The answer lies in the most useful, but most scarce (limited) resource ever: TIME (and yes, time does indeed equal money). You will take advantage of compound interest paired with time; along with the right investments, you can have a capital powerhouse.
The magic of compound interest
Compound interest does wonders for young investors in the long run (it’s not magic, it’s just basic math). Here are a few monetary examples that will get you to start investing at a young age.
-If you had invested $1000 in Berkshire Hathaway (BRK-A, Buffett’s company) in 1964, and patiently waited 50 years until 2014, you would have $18,261,630 (a whoopin’ 1,826,130% gain).
Let’s visit a few examples, with fixed variables just to show you what compound interest can do:
Let’s say you invest $8000 today, into a fund that will average out 8% a year, compounded for 33 years:
Year 1: $8,640
Year 5: $11,754.62 Year 30: $80,501.26
Year 10: $17,271.40 Year 31: $86,941.36
Year 20: $37,287.66 Year 32: $93,896.66
Year 27: $63,904.49 Year 33: $101,408.40
Year 28: $69,016.85
Let’s say instead of starting to invest when you’re 22 years old, you start later at 25.
That’s a 3 years difference. By the time you hit that $80,501.26 mark, someone who started 3 years earlier would have $101,408.40. Imagine what you can do with an extra $20,907.
Let’s go with a more eye-opening example, a fund that yields good results:
Let’s say you invest $12,000 today, and another $100 monthly into an amazing stock or fund that will yield 15% a year compounded for 23 years.
Year 1: $15,095.42 Year 19: $285,052.50
Year 5: $32,870.49 Year 20: $329,105.79
Year 10: $74,848.51 Year 21: $379,767.08
Year 15: $159,281.30 Year 22: $438,027.56
Year 17: $213,434.67 Year 23: $505,027.11
Year 18: $246,745.29
Like the previous example, instead of starting at 22, you start at 25. Within those 3 years, you’re lagging behind $175,921.32 compared to someone who started at 25. You’ll have $329,105.79 (still very good) while you could have $505,027.11 (half a million dollars-even better), if you had just started 3 years earlier.
Think about it… that difference is enough for a considerable downpayment on a condo/ house in Toronto, Canada or can be used as retirement income.
Of course, this example fixes a lot of variables and requires a good return of 15% compounded over 23 years (rare, but yes, this type of performance does indeed exist): it shows the importance of time and starting early in investments.
“A low-cost index fund is the most sensible equity investment for the great majority of investors…by periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals”.
Now let’s say you decide to buy an index fund, as suggested by Buffett. Let’s keep it simple and select the Dow Jones Average. In 1915, it was $1,304 (inflation adjusted) and is currently sitting at around $17,360 as I’m writing this in late spring 2016. In 101 years, it went up around a total of 1,352%. That’s a multiple of about 13 times your investment. Compound interest paired with time does wonders.
If you’re worried about the market crashes and depressions, note this:
The Dow Jones Average survived the Great Depressions and countless others, 2 World Wars, more wars that followed, oil glut, the dot-com bust, the subprime mortgage crisis, etc. and will continue to survive and strive for times to come.
Mistakes are inevitable, they are part of the learning curve but you want to learn from it early, not late. Starting early will leave you room for mistakes. It allows you to adjust your strategies and gives you extra time to learn.
“If you love life, don’t waste your time, for time is what life is made of.”
In summary, the examples provided have many fixed variables. The goal was to illustrate the difference even a few years can make in compound interest output. I am not implying that investing in stocks, bonds, index funds, mutual funds, etc. is the only way to take advantage of time. You may even choose to invest in your very own business.
Therefore, first investing in yourself could prove to be an invaluable investment, paired with time, your skills will grow exponentially which may provide you with valuable breakthrough ideas and investment knowledge.
All in all, start early, not late. Perhaps the earlier you start, the earlier you get to reaching your goals, and perhaps then, the more time you’ll have to enjoy your definition of a successful life. I would recommend the following books for those beginning in investing, the knowledge I have acquired from them are invaluable.
Of course, JMO (just my opinion).
For beginners, I would recommend the order as follows:
1-The Neatest Little Guide to Stock Market Investing by Jason Kelly (I read this first too).
2-The Intelligent Investor by Benjamin Graham (Life changing book)
3-One Up on Wallstreet by Peter Lynch
4-Common Stocks and Uncommon Profits by Philip A. Fisher
5-Technical Analysis of The Financial Markets by John Murphy
6-Options made Easy by Guy Cohen (Just to explore derivatives)