Truths of Investing
Many people want to start investing and building their wealth but somehow, they are still waiting for something. Maybe a bigger salary, maybe when they get older, they would get more knowledge and can invest most successfully. But there is no need to wait and while you wait you can miss out on big gains and returns. The time to invest is now, the younger you start to invest the bigger your successes will be.
The earlier you start investing, even in small amounts, the faster you will accumulate a significant amount than if you start later with larger amounts. This is true assuming that investments are made periodically and without interruption. The assumption is also based on the principle of average returns.
The earlier you start investing, the more capital you will accumulate, even if you do so with smaller amounts than if you start saving and investing later. In the following example, there are two investors: Marley and Beatrix. Marley starts earlier by allocating $5 000 each year, and Beatrix starts later by allocating $10 000 each year. Each earns the same annual compounded return of 7%. Marley invests $200 000 over his 40-year investment period, while Beatrix invests $300 000 over 30 years. You can see the final result in the figure below:
Marley has saved more money in the form of investments, although he has invested less because he started much earlier. This is known as cumulative returns.
Since we have already established that you need to start investing as early as possible, which investments should you choose according to your age? This is the subject of the following illustration, which shows statistics for a period of more than 40 years.
The older the investor, the more his capital allocation should move to the left (top of the allocation picture), where there is less volatility, as there is less and less time left until retirement when the accumulated capital will be used. Older people should not risk their accumulated wealth and opt for safer investments such as government bonds. The younger the investor, the more aggressive the investment strategy and capital allocation should be and the more aggressive the return should be, as there is still plenty of time before old age and the investor can weather one or even several market downturns.