The Power of Time (and why you should start investing now)

I often see over the internet people asking questions such as:

- "I am 17 and want to learn about investing, where do I get started?"

- "I am a college student with $5,000 to invest, what are my options?"

- "Can I start investing with $1,000, and how?"

These are all questions that cross the minds of many young people and, to some extend, depict how our education system has failed. It is fascinating that so often business/investment education is not a critical aspect of education systems, while managing and investing money will be of fundamental importance for the rest of our lives. This blog is motivated to help people find answers to such questions in a simple manner so that they have a starting point to develop their investment strategies.

Regarding the last two questions that depict some fix amount ready to invest, some answers I have seen were that it's a small amount and probably not worth investing. While having $1,000 to invest will not give you much flexibility to trade individual stocks (commissions will eat your money away), you definitely have some options! Two clear-cut options are to buy bonds or index funds, where you will face a percentage fee that will be low due to your investment amount.

So is starting to invest $5,000 today worth it? Let's have a look.

We will assume our passionate youth investor has $5,000 and will be building himself a well-balanced index portfolio that yields him 7% annualized average. We will assume that over the years, he will contribute $1,000/year to his investments. Let's watch how his money grows over 50 years:

After 50 years, our investor is now a bit older and has contributed a total of $55,000 to his investment portfolio ($5,000 to start and $1,000/year afterwards). His portfolio value is now a staggering $553,814! How is that possible? Well, your best friend when it comes to investing is time. The younger you are, the more time you have to make your money work for you. Even if it is a small sum, it really does add up. That initial $5,000 alone would be worth $10,000 after about 10.5 years and by the end of the 50-year period, it would be worth $147,285.

Let's look at some of the assumptions here. First off, you never paid any taxes on your earnings, which could be the case if you made use of a TFSA. Second, a 7% return annualized is achievable with a balanced index portfolio, although if you were to hit a downswing right out of the gates, this would significantly impact you down the line (given your initial capital is 5x your yearly contribution). In this example, we simply assessed 7% as a linear return, which would not be the case, some years your might lose 5%, some years you might gain 12%. Regardless, the example does depict the power of time.

Let's now look at a different case, let's compare the same investor who decided to spend his $5,000 and held off investing for another 10 years. Can't be that bad can it? Well let's have a look over that same 50-year period:

So actually, it's pretty significant. In the second case, a total contribution of $45,000 has been made, as compared to $55,000 in the original case (an extra 10 years at $1,000/year contribution). Let's look at the end result though: our delayed investor has a portfolio value of $274,507 versus the more diligent investor with $553,814 - over twice the amount! How is that possible? Again, think back to compounding. The 7% you made your first year off the $5,000 has made 7% from itself every year, this progression reiterates itself every interval and for your contributions. This is how you can establish wealth off not much starting capital!

The sooner you begin investing, the better off you will be. Even a small sum can grow into a fortune under the correct conditions. Don't listen to those telling you a small sum isn't worth investing! You have to start somewhere and if the small sum even just motivates you to save up money, it is immensely valuable.

Here is a link to the table breaking down the number for the graphs depicted above (graphs may not load, but table works). Comment below if you have any questions and please give the blog a G+ follow! More posts on similar topics coming soon!


-Yinvestors.


keywords: youth investing, compounding interest, compounding growth, growing money, how to make money grow, investing, money growth, index funds, index investing, money.