Every now and then, you hear people say that the earlier you start investing, the better. Some people would even give examples of stocks that have skyrocketed lately. People change their perspective from real estate to gold, from gold to silver, from silver to stocks, and from stocks to cryptocurrencies. Yet, at the end of the day, you are nowhere. Why is that? Because investing is not a sprint, it is a marathon. It does not matter when you start, but how you start.
Investing is a long-term game; if you want to be successful, you will need patience, discipline, and a perfect strategy. The idea that the earlier you start, the better, is a myth. If you keep believing that, it can be detrimental to your financial well-being. In this blog, we will explore the fallacy of “you must start early” and offer some tips on how to overcome it, using historical examples.
1- The idea of compounding
The concept of “the earlier you start, the better” is based on the power of compounding. Compounding is a process in which you earn interest on interest. So when you start earlier, you will have more interest at the end of the day. But this is only part of the picture. Because let’s assume you start investing $100 at the age of 25. At the age of 65, you will have more than $600,000 in your pocket (taking a 7% annual return). This is a big win.
However, if you start investing at the age of 35 with $200, by the time you reach 65, you will have more than $600,000, even though you began ten years later. This example illustrates that even if you start later, consistent contributions over time can still lead to a substantial amount of money. It’s like planting and watering a seed consistently; you will see growth over time.
2- The importance of consistency
No matter when you invest, consistency is required for a successful business. It is the key to success. Additionally, consistency allows you to ride out the ups and downs of the market. To understand the importance of consistency, you need to look back at history. In the 1920s, stock prices were soaring, and this hype led many investors to invest in stocks. However, when the market crashed in 1929, many of these investors lost everything. On the other hand, those who were consistent with their investments and had a long-term strategy in place could weather the storm and come out ahead in the end.
The above example tells us that consistency is more important than opportunity. Despite the fact that many people make a lot of money from their early investments, a sudden market downturn takes them nowhere. And those investors who were not opportunistic survived the Great Depression of 1929. So the early investment does not matter; the long-term strategy does.
3- The importance of time in the market
The success of your business depends on how much time you spend in the marketplace. The more time you spend on the ground, the more you will gain excellent and bad experiences. You can begin investing once you have gained experience. Additionally, wait to sell your shares too early when investing. The more you stay, the better.
For instance, you invested $10,000 in the stocks in 2015 and will share your shares in 2020. On the other hand, if you hold your shares until 2025, you’ll have more than $60K in your pocket compared to just $20K (sold in 2020). This example shows the importance of time in the market and how short-term thinking can lead to missed opportunities.
4- The importance of diversification
In order to have a long-term strategy, you should invest across different asset classes, sectors, and geographies. This will not only reduce the risk but also increase the sources of income, leading to a significant impact on your portfolio. With a diverse portfolio, you will have little fear of failure and can take investment-based risks. However, you will hardly take a chance if you have more than one portfolio.
Suppose you have invested $100K in a giant tech company, which gives you a handsome profit for about a decade, but suddenly the tech company loses its worth. You have no other choice but to accept your failure. On the other hand, if you have invested in different stocks, bonds, and real estate, a single failure of business would not affect you because you will have a backup plan for the loss. That is why diversification is more important than an early start.
5- The importance of saving
The earlier you save, the more you will have. This is one of the reasons why most people think investing earlier is better. But there is a fallacy in it. If a person begins saving $500 per month at the age of 25, he will have approximately $900,000 in his bank by age 65. However, if another person started saving $1000 per month at the age of 35, he would have around $960,000 at the age of 65. So it does not matter when you start saving; what matters is how much you save.
Start investing when the time is right, and then save your money. You will have more money at the end of the day if you follow a better and more well-planned strategy. Do not rush into things because it may lead you nowhere.
6- Do not wait too long
Starting earlier has its pros and cons, as does waiting. It is advised to wait for the right moment, but only when opportunities are left in your basket. If you started investing near your retirement age, you would get nothing compared to when you started at the age of 25 or 30. Spend time in the market, study the market for a few years, and then start investing in stocks, real estate, and other shares.
If you start late, you may need more time to make up for potential losses or market downturns. Additionally, if you wait too long, you may miss out on the opportunity to take advantage of compound interest. So when you think the time is right, start investing, no matter how much money you have.
Starting early can be advantageous when it comes to investing, but it’s not the only thing to take into account. Your investment returns may be impacted by a number of critical factors, including the power of compounding, the value of saving, the risk of holding investments for too long, the value of market experience, and the significance of diversification. The primary lesson is that while getting a head start on investing can be advantageous, it’s not the only one. Concentrating on the factors within your control, such as long-term investing, diversification, and conservatism, is crucial. No matter when you start, you can raise your chances of accomplishing your investment objectives by doing this.
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