I looked at him, smiled and told him that if I was walking to the Botanic Gardens, then I most definitely would not be starting from here. I don’t think he quite appreciated my peculiar sense of humour.
Let’s start at the very beginning
The same cannot be said about investing. We can theoretically start anywhere we would like. However, it is important to bear in mind a few things. It is vital to know where you are now, where you would to end up and how long you plan to take to get from where you are to where you want to be.
There are a couple of other things that you might want to consider too, namely, how much you plan to invest and the amount of risk you are prepared to assume.
That might seem like a lot of stuff to digest in one go. But they are linked in an interesting but convoluted sort of way.
Let’s say that you start with nothing in your investment portfolio today. But your aim is to have $1 million in there before you retire. Those two numbers will only tell you what you hope to achieve. It doesn’t say how you plan to get there.
Let’s now put a bit of flesh on the bone. Your aim is to reach the million-dollar mark in 30 years. Now we are getting somewhere. We have a starting point, an end point and a time scale to work with. But we still haven’t got quite enough information to go on, yet.
We still need one more piece of information to complete the jigsaw. We need to know how much you plan to invest, be it monthly, annually or in one lump sum.
Making things easy
Let’s use the easiest option – a lump sum investment. If you were to invest a lump sum of $100,000 at an annual return of 8% compounded, you could reach your $1million goal in around 30 years.
In other words, the constraints you have set should be attainable. That is provided you are comfortable with taking on an investment that returns around 8%, which would mean investing in the stock market rather than a savings account.
Let’s make things a bit more interesting by assuming that you only have $50,000 rather than $100,000 to invest at the outset.
To achieve $1 million, you would now need to find an investment that could generate a compound annual return of about 10%. That is still not outrageously difficult. But it would mean taking on a bit more risk to achieve the same reward within the same time scale.
There is a way around the problem of taking on more risk, namely to extend the amount of time that you leave the money invested. With $50,000 at your disposal, you could achieve the same $1 million pot by lengthening the investing period to 40 years rather than 30 years.
The upshot is that achieving your financial goals is within your control. You get to choose how much, how long and the amount of risk you are comfortable with. Personally, I like the idea of investing little and often over a longer period of time.
My two children are doing exactly the same. The only difference is that their investing horizon is much longer than mine. They will probably have more than me when they reach my age.
That is the advantage of starting early. But it is never too late to start. So, get started straight away because today is already yesterday’s tomorrow. And the sooner you start, the sooner you will benefit from the magic of compounding.
This article first appeared in a SIAS newsletter.
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