Why it pays to start investing early
28 February 2013
At the time you start your first-full time job, investing and providing for your future may seem like something you do later in life. Then in your 30s there are usually other priorities that we focus on such as paying the rent or mortgage, or saving for holidays. We believe it’s never too early to start investing. In fact, the earlier you start, the more you can make out of compound interest.
Compound interest is interest that is paid on both the principal and also on any interest from past years. It’s often used when someone reinvests any interest they gained back into the original investment. For example, if I receive 15% interest on my $1000 investment, the first year and I reinvest that money back into the original investment, then in the second year, I would receive 15% interest on $1000 and the $150 I reinvested. Over time, compound interest will make much more money than simple interest.
Take a look at the following chart. It shows a comparison of a $10,000 investment with an assumed interest rate of 4% per annum using simple interest (which is generally applied to a savings account) versus the same investment, with compound interest applied. At the end of a twenty year period, the simple interest investment returned a total of $17,600 while the compound interest investment returned $21,068.
Regular investments can make a significant difference over a 20 year plus timeframe
Source: Source: AMP Capital. For illustrative purposes only.
What should I invest in?
Deciding which assets to invest in is never easy. There are many factors to consider but your choice will largely be determined by your investment timeframe, your financial goals and your stage of life.
If you are close to retirement or have a short-term goal such as an overseas trip you may wish to choose assets that are lower risk and that give you easier access to your money, such as bonds or cash.
But if you are investing for the medium- to long-term you may wish to choose to invest in assets that can help your savings grow over time such as equities, property and infrastructure.
No matter how far away your goal is, it is important to invest in assets that allow you to keep ahead of inflation, or the cost of living. Otherwise you will find your spending power is reduced when you decide to draw on your investment.
Why it pays to stay invested
An important aspect to successful long-term investment is understanding that economic conditions fluctuate over time. We believe there are some fundamental principles that will help you make successful choices when investing for the long term. Keeping these in mind, particularly when financial markets become volatile, will help you stay on track.
Important tips for successful investment
We believe there are some fundamental principles that will help you make successful choices when investing for the long term. Keeping these in mind, particularly when financial markets become volatile, will help you stay on track:
The cycle lives on. History tells us that downturns may be followed by upswings, so we believe it’s best not to make hasty decisions during times of volatility.
Compound interest and regular investments of small amounts can make a significant difference over 20-year plus timeframes.
Buy low and sell high, as starting point valuations matter.
Focus on investments providing decent and sustainable cash flows, dividends, distributions, and rental incomes, as they may be a good buffer in volatile times.
Invest for the long term. For those with a short-term horizon, think about what type of returns or cash flow you need to both protect your savings and keep ahead of inflation.
Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.