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When to start investing?

Mark LaMonica, CFA  |  02 Jan 2018Text size  Decrease  Increase  |  
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You don’t need a lot of money to begin investing. By making small regular contributions over time, you might be surprised by how quickly your investments accumulate.

Investing the same dollar amount at regular intervals can help smooth out the ups and downs of the market. Investing the way means you purchase more shares or units when prices are low and fewer when prices are high.

It’s important to start saving as soon as you can. The longer your money is invested the more you can take advantage of compound interest.

 

The cost of delay


chart


 

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The above chart shows how substantial a difference investing early can make. It compares the final size of the investment pools of two investors: one (portfolio A) who invests $100 each month over a 20-year period starting in July 1987; and another investor (portfolio B) who starts 10 years later in 1997 but tries to catch up by investing $200 per month for 10 years.

Both invest a total of $24,000 but because the first investor started earlier they have over $33,000 more than the later investor after 20 years.

‘Time-in’ not ‘timing’

Patience is its own reward. But patience also rewards investors.

Most of the long-term gains on equity markets are made or lost in just a few trading days each year. Take away those ‘big’ days and returns are more like what you would expect from a defensive investment. Investors who lose patience and get out of the market run the risk of being absent when significant gains are made.

 

Australian shares 1984-2007


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If you had invested $1,000 in Australian shares in 1983, 24 years later it would have grown to $21,064 (making an annualised return of 16.5%). If you had invested the same amount over the same time period except for the 10 biggest days you would have just $10,234 (an annualised return of 12.3%).

Markets are unpredictable, so pricing those big days is impossible. Staying invested means you capture the full benefits of the share market. Your returns might be down one month, but by withdrawing from the market you run the risk of missing out on the recovery.

 

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Mark Lamonica is a product manager, Individual Investor, Australia.

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is a product manager, individual investor, Australia.

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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