Is this an Increasing Threat for Young Investors?

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John Clifton “Jack” Bogle is best known in the investing world for his role in popularizing and creating the world’s first index mutual fund. He founded The Vanguard Group in 1974 and the firm has gone on to great heights.

In March 2014, the company reportedly had US$2.86 trillion in assets under management.

My colleagues at The Motley Fool over in the USA managed to interview Mr. Bogle in Nov 2013, and in it, the investing giant shared nugget after nugget of valuable advice for all Foolish folk alike.

In particular, the 84 year old Mr. Bogle had the following to say about time horizons for young investors (aged 25 years or below):

“But you’ve got to look at 40 or 50 years. To these young people today (say they’re 25 years old), 50 years is like 75 years. That’s too short. They’ll live to 95. They should be looking at 70 years and these numbers just get further and further apart.”

Mr. Bogle has a point, and it applies to Singapore as well. The life expectancy for folks in Singapore have been quietly rising since 1957. According to the Department of Statistics of Singapore, for 2013, life expectancy for males and females was 80 years and 84 years respectively. In 1957, it was just 59 years for males and 63 years for females.

Said another way, this means youngsters today have to look even further ahead when it comes to their investing horizons.

Gosh, is this a bad thing?

However, Foolish folk may rejoice at the sound of longer investing horizons. And, the reason is simple. With the power of compounding, the returns on investment get better as time goes by.

Consider these three SGX-listed companies:

Company 5 year return – since 1 January 2004* 10 year return – since 1 January 2004
VICOM Limited (SGX:V01) 163% 1099%
Raffles Medical Group Ltd. (SGX:R01) 133% 1151%
SembCorp Industries Limited (SGX:U96) 138% 666%

*Data as of 13 August 2014; all prices are adjusted for dividends, splits, and rights issues

Source: S&P Capital IQ

Investors who invested into the three companies above would have amassed an average return of 145% after five years. Double that time period, and stretch it out to the beginning of this year – and the difference can be truly mind-boggling. That extra five years would have disproportionately earned an average total return of 972% for investors.

This is the power of compounding at work. And that’s the kind of returns that even Warren Buffett would be agreeable with. My American colleague, Morgan Housel notes:

“Of Warren Buffett’s current $60 billion net worth, $59.3 billion came after his 50th birthday, and $57 billion came after his 60th. Compound interest works its wonders only in very long periods of time.”

Foolish Bottom Line

Tom Gardner, Co-founder and CEO of the Motley Fool, once said that the primary advice he would give investors to help them improve their returns, would be to double their holding period for the shares they own. The reason becomes apparent – as we’ve seen above – when we compare the difference in returns between a holding of five years and a holding period of 10 years..

As such, instead of viewing a longer life expectancy as a “threat”, Foolish young investors might want to instead rejoice at the longer period that allows investments to compound.

In light of the eye-popping returns above, I would readily tip my Foolish hat to Tom’s advice.

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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 contributor Chin Hui Leong doesn’t own shares in any companies mentioned.