When it comes to investing its time in the market, not timing the market that counts. Therefore, the earlier you start investing, the better your portfolio should perform. Unfortunately, many young people either don’t have investing particularly high up their priorities list, or may not have the discipline or surplus income to invest.
Many in recent years have been drawn towards very high risk assets such as crypto or individual stocks and potentially been burnt, making them skeptical about investing overall. But young people who follow a traditional approach of regular investments into low cost ETFs will surely thank themselves in the future.
The benefits of early investing are mostly thanks to the effect of compounding and dollar cost averaging over a long period of time. Let’s look at some examples of how this works:
Person A invests $200 every month from the age of 20. By the age of 30 they have saved $24,000. Assuming a growth rate of 5% per year, this pot would have a value of $30,998.41.
By the age of 40 their portfolio would be worth $81,491.56, having paid in a total of $48,000.
By 50 it would have grown to $163,739.57 and by 65 they would have $393,583, of which more than 2/3rds is just from interest. Assuming they continue to achieve 5% growth, this pot could provide them with an income of $19,679 per year indefinitely.
Person B starts investing later on in life at 30. With the same monthly amount invested as person A, and the same rate of return, they would have a pot of $222,595 by the time they are 65, providing a yearly income of $11,129.75.
If person B hopes to have a portfolio which is the same value as person A’s, they will need to invest $354 a month rather than $200. This means that they will have to invest $148,680 to get the same result as person A, who only had to invest $108,000 to get their pot value.
Dollar cost averaging when investing
One of the benefits of dollar cost averaging is that you continue to buy into the markets regardless of whether they are up or down. This results in you buying a larger share for the same amount when markets are performing poorly. Whilst time in the market is still better, if there is a long period of time in your investment time frame where markets are down, this could be advantageous if you’re a consistent monthly investor.
In the case of someone investing $200 a month into the S&P 500 from 2008 until 2023 vs someone who invested the same amount as one lump sum in 2008, the lump sum would now have a higher total value, but the annualized percentage return would have been higher for the monthly investor. The annualized return on an investment of $36,000 in January 2008, into the S&P 500 was 9.39%. For the same amount invested at $200 a month over the same time frame, the return would have been 11.89% annualized.
Just get started investing
If you were like most people and didn’t manage to get a portfolio going as young as you would have liked, it’s better late than never and the sooner the better so, just get started. If you don’t know where to begin, our advisers will be well placed to help you get set up with a low cost ETF portfolio that’s in line with your goals and risk profile.