Brian O’Connell* says investing is the best way to create and build personal wealth and it’s easy to get started.
Learning how to start investing is an exercise that almost always bears fruit.
The best thing about starting to invest is you can start small, afford to make a mistake or two along the way, learn from that mistake, and apply the lessons you learn as a fledgling investor for the rest of your life.
The benefits of investing early
It certainly pays to start investing as early as possible.
According to a Provident Investment Management study, a 25-year-old who invested $5,000 annually until age 35, and invested zero dollars for the next 25 years, would have $615,580 by age 60 (at an average annual investment return of 8 per cent.)
That’s a great return on only a $55,000 investment.
Now, take another 25-year-old who waited 10 years to start investing, and you start to see the real benefits of investing as early as possible.
At 35, this investor invests $5,000 annually for 25 years and earns the same 8 per cent interest on the investment.
By age 60, that $130,000 has done well, turning into $431,754 in total assets, but that’s still well below the first 25-year-old’s haul, and without having to invest $5,000 annually for 25 years.
It only takes $100 a month to get in the game, and you can build up your investment contributions from there.
You can take more investment risk: The sooner you start investing, the more risk you can take with your investments.
On Wall Street, anyone will tell you that the more risk you take when investing, the higher your potential returns.
By starting early, you can absorb any losses you incurred on a riskier investment, and still have time to make up ground.
If you’re 50 or 60, risky investment mistakes tend to have a larger impact on your portfolio, and the money lost is hard to recoup when you’re so close to retirement age.
You benefit from compound interest: Compound interest (the interest gained and reinvested over time on an investment) keeps on growing as long as you keep investing.
Compound interest enables your investment principal to grow over time, as long as you don’t take the money out.
Let’s say you invest $300 monthly over the next 10 years, and get an average 6 per cent rate of return annually.
After a decade, you’d have over $48,000.
But if you doubled your investment to $600 over the same time frame and at the same 6 per cent rate of return, you’d earn $183,451 on your investment.
That’s the beauty and power of compound interest.
You can retire earlier: Starting to invest as soon as possible gives you the time you need to build the retirement income you’ll need to call it quits early.
Starting your investing
To start your investing campaign, you’re going to need to take a regimented approach, and generate some good financial habits.
That means adopting the following disciplines.
Invest every month: This doesn’t mean busting the budget and steering too much cash into your investments, but it does mean taking a suitable amount, say, 10 per cent of your monthly income.
Get a savings account: Start with small steps, like putting a fixed amount into a savings account every week.
Use Acorns: Go mobile and get the Acorns smartphone app, which takes the spare change from your credit and debit card spending and automatically steers it into a savings or investment account for you.
Maximising your investment strategy
Your investment strategy is best constructed with the long term in mind.
Thanks to compound interest, money keeps growing and growing as long as you keep the money invested.
Stocks are generally the best way to grow your investment assets, but they do come with the risk of a decline in value.
Mostly though, stocks appreciate over time and are regarded as a relatively stable investment vehicle.
Bonds offer less risk and less return than stocks.
According to industry figures, bonds have averaged over 7 per cent in annual returns from 1980 to 2017, while stocks have returned over 12 per cent.
Stocks, bonds and funds aren’t the only way to invest your money but they’re the easiest and most effective investment vehicles you can choose on an everyday basis.
You can also invest in hard assets, like gold, silver and oil, or even invest in collectibles, like comic books and coins.
Those investments require special expertise, and also offer more risk and volatility than stocks and bonds.
* Brian O’Connell is a former Wall Street bond trader and freelance writer.
This article first appeared at www.thestreet.com.
