Take Tesco’s Prudent Advice: The Magical Power of Compounding
In investing, time is your friend. The longer an investor can commit funds to a strategy, the greater the possibility of success. I’m sure, for many of us, we wish we could give our younger selves the advice to start saving earlier. In young adulthood, often times there are many demands on cash flow, and it can feel difficult to get ahead. Working long hours in an entry-level job with student loans, rent, a car payment, and learning to deal with (gulp) taxes can be overwhelming. The thought of setting aside precious net earnings for retirement which may be forty years or more down the road seems preposterous.
However, making a very small sacrifice now can have an exponentially powerful effect later in life. Let’s look at the impact of starting to save and invest early vs later in life. Assume we have four individuals at different stages of their lives who want to begin a monthly investment strategy with the aim of accumulating $1m by the time they reach age 65. They are all aggressive investors and want to implement an equity-only strategy that will earn 10% on an annualized basis. The table below shows the impact of compounding growth and time in the market (gross of costs):
|Total Lifetime Cost of Investment||$51,516||$110,624||$226,101||$434,290|
|Assumed Annualized Rate of Return||10%||10%||10%||10%|
|Value of Investment age 65*||$1 million||$1 million||$1 million||$1 million|
*No assurance or guarantee can be given that an investment portfolio commenced at any age will reach a specific target value as the outcome will be dependent on various factors, such as market conditions, choice of asset allocation and costs. The value of investments can go down as well as up.
The difference in the lifetime capital requirement is striking. We are faced with demands on our cash flow every day. Some are fixed (mortgages, taxes, etc). However, we all have an element of discretionary spending in our budget. The choice to dine out versus eat at home, buy a name brand vs generic product, fly economy vs business class…the list goes on. By making small changes to our discretionary spending, regardless of the phase of life we are in, we can direct more capital into long-term savings and vastly increase the likelihood of reaching our goals.
If you are reading this and you are in your 20s or 30s, take heed and consider making the choice to invest in your future financial well-being by adopting small changes in your lifestyle. If you are closer to retirement (or perhaps in retirement), don’t lose heart. It’s still important to regularly review your expenditure and consider if there areas in which you can reduce costs. As the Tesco slogan says “Every Little Helps”.
Risk Warnings and Important Information
The value of investments can go down as well as up depending on market conditions and you may not get back the original amount invested. Investments involve risk and your capital is always at risk. Past performance is not a reliable indicator of future results. There is no guarantee strategies will be successful.
The above article does not take into account the specific goals or requirements of individuals. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.