Whether it’s stocks, bonds, cryptocurrencies, real estate, or even gold, many investors are always researching and speculating for that precise moment to invest. But is this always the best strategy? Apparently not, according to American billionaire, investment analyst, author, and founder and executive chairman of Fisher Investments, Kenneth Fisher, who said, “Time in the market beats timing in the market.”
The Power of Compounding Interest
While many investors intuitively accept this idea to be true thanks to the prevalence of long-term investing, many still underestimate the power of compound interest that comes when we start investing as early as our 20s. Using an animated chart available from Visual Capitalist, assuming we start investing $250 per month with an assumed rate of return of 8% from the age of 20 until 60 years old, we would find that we’ve netted a total return of $1,279,625 by the time we reach 65 years old.
What is infinitely more surprising is that roughly 56% of our annual returns come from the money we invested in our 20s, rather than the latter decades, which only equate to 44%. To put that figure into perspective, we would have gained $716,590 from the initial sum of $30,000 invested from our 20th birthday right up until our 30th birthday, thanks to the power of compound interest.
How early investments can pave the way for lifelong financial security
To illustrate the power of compounding interest further, there’s a famous scene from the sci-fi TV show Futurama where the main protagonist Fry was frozen in time for 1,000 years. When he finally returned to his bank, his initial balance of 93 cents had grown to a grand total of 4.3 billion dollars just from an interest rate of 2.25% alone. Watch the scene here.
Starting Early vs. Starting Later
That being said, and in the absence of time machines, not many individuals in their 20s might have the discipline or even steady income to invest regularly as compared to their 30s or even 40s. So, would it be better to just wait until one finally has more money? Unfortunately, even if you were to double down and start investing $500 per month from your 30th birthday onwards, you will find that your earnings would fall short compared to your peers who invested half the amount in their 20s. This is because your compound interest would have far less build-up and momentum to ride on.
The patience and willpower required to invest monthly for decades on end, while ignoring the urge to utilise any of their finances, is incredibly high for younger folks. It isn’t hard to imagine that someone in their 20s might struggle with many personal and societal needs such as buying new gadgets, wearing trendy clothes, travelling the world, or even eating out with friends or dates.
Instilling Financial Discipline
However, parents can combat this by instilling a frugal and investing culture in their children early on. We already know how much someone can stand to gain when they start investing in their 20s, but if parents can get the ball rolling for them as early as 10 years old, who knows how much can be awaiting them when their children finally reach retirement age.
Despite living in an era where short holding periods and quick rewards are ever so popular, one cannot deny the tried and tested reliability of long-term investments. The average holding period for stocks in the 1950s may have dropped from 8 years to just 5.5 months in 2020, but with recent interest rate hikes and threats of a looming recession, savvy investors may very well return to long-term investing strategies — and so should you.
Stay patient, invest wisely, and secure your future with strategic, long-term investments.
