The legendary global super investor Sir John Templeton was reportedly once asked by a member of the audience in a talk that he was giving: “I’ve just inherited some money from my grandfather. When is the best time for me to invest it?” Templeton’s response was refreshing: “Young lady, the best time to invest is when you have the money.” Put another way, the best time to invest was probably yesterday (figuratively speaking). Compounding – Albert Einstein’s much celebrated ‘Eighth Wonder of The World’ – even at low interest rates, becomes miraculous with each added decade….
The legendary global super investor Sir John Templeton was reportedly once asked by a member of the audience in a talk that he was giving: “I’ve just inherited some money from my grandfather. When is the best time for me to invest it?”
Templeton’s response was refreshing: “Young lady, the best time to invest is when you have the money.” Put another way, the best time to invest was probably yesterday (figuratively speaking).
Compounding – Albert Einstein’s much celebrated ‘Eighth Wonder of The World’ – even at low interest rates, becomes miraculous with each added decade.
Consider two investors. The first started ploughing money into shares at the age of 18 while the second only started doing so at 23. Let’s further assume that both started investing with a fixed sum of $1,000 and managed to grow it at 8% a year till they were 65.
For the record, long-term returns of 8% aren’t exactly unrealistic given how the SPDR Straits Times Index (SGX: ES3), an exchange traded fund tracking Singapore’s stock market barometer the Straits Times Index (SGX: ^STI), has a compounded annual return of 8.45% from April 2002 to Nov 2013 (a period encompassing more than 11 years that contained a dreadful global financial crisis, no less) after accounting for reinvested dividends.
Either way, the first investor would have ended with $37,000 while the latter would be left with only $25,000. That’s a difference of $12,000 in returns which is definitely not trivial. And, there was only a five year gap in the investing time frame between the two investors!
I was having dinner with a social entrepreneur recently, and she shared how she had heard statistics of how young people in Singapore just do not see the need to get started early in investing.
That was quite a revelation for me. How could someone not want to get started as soon as possible, given the increasingly-outsized effects that compounding can have on one’s returns with each passing year? The earlier we start, the more we can allow compounding to work its magic!
Turns out, part of the reticence to start investing can stem from a lack of funds. That’s understandable, given how young people might need to clear education loans and save up for marriage and housing. But for those with more means, their inertia with starting an investment into shares – at least from my own anecdotal observations – also stems from a lack of understanding about the whole concept of risks in the stock market.
On a day-to-day basis, wild swings in share prices can seem illogical and without reason (and they often are). Many market participants look at them and think, ‘that’s risky!’ But they are also often the ones who fail to take a step back and look at the big picture.
A share represents, in essence, the partial ownership of a business. And over the long-term, the fortune of a share becomes intimately tethered to the fortune of its business. “If a business does well, its stock eventually follows”, as billionaire investor Warren Buffett once said. That’s one part of the big picture many fail to see.
The other part of the big picture, is how time itself manages to erode away many of the ‘risks’ associated with volatile short-term price swings.
For instance, just check out the charts below. For an investor who made monthly investments of equal amounts into the Straits Times Index at the start of every month since the start of 1988, the charts show how odds of facing losses become dramatically reduced with a lengthening of the holding period.
Time is often the best ally one can have in the markets. The earlier we start investing, the more time we have for two important factors to surface: compounding can begin to work its magic; and, the odds of success can be firmly placed in our favour.
Investor and financial advisor Nick Murray once said “Timing the market is a fool’s game, whereas time in market is your greatest natural advantage.” I think Murray’s clearly on to something. What do you think?
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.