Overview – Getting an Early Start
In a previous article, we talked about the possibility of starting to invest too early. Indeed, so many investors-to-be are obsessed with starting their investment careers as early as possible that they fail to ask if they’re in any position to begin at all.
There are very legitimate reasons for hopeful investors to put off their careers, ranging from unstable finances to poor emotional control. Beginning an endeavour as major as investing when you’re in no position to do so rarely ends well, yet so many people continue to make this blunder.
With that being said, let’s take a look at the other end of the spectrum: assuming a prospective investor is ready, should they start their investment career as soon as possible? In many cases, the answer is arguably “yes”.
There are a plethora of benefits to starting your investing career as early as possible, and the earlier you start, the better. Let’s discuss what exactly those benefits are.
Investing Early Is All About Maximizing Your Time
“Time is money” is such an oft-repeated phrase that it has started (or already has) become trite. Despite its overuse, its underlying message continues to stay true – time is invaluable.
Time is the one resource that we can never hope to recoup. Unlike our money or energy, once our time is gone, it’s gone for good. So, it comes as little surprise that most people try to make the absolute most of the time that’s available to them.
To achieve that, many people try to start certain endeavours as early as possible. Whether it’s working out early in the morning or starting a visa application several months in advance, people make the most of their available time to maximize their chances of success.
The same idea applies when it comes to investing early.
Assuming an investor is ready to start, then it’s in their best interest to start as soon as possible. Every year they forego starting their investment careers is a year of opportunity, growth, and lesson learning they will never get back.
One or two years may not seem that substantial but time flies, and before you know it a good chunk of time will have passed. For investors, every year they have to work with counts.
Now, this doesn’t mean investors need to rush to get started. Rather, once they feel ready to begin, then they shouldn’t drag their feet and delay their start any longer than they need to.
Many of the benefits that come with getting an early start in investing revolve around making the most of your available time, some of which we will discuss in the next section.
Some Notable Benefits of Investing Early
Maximize the Effects of Compounding
Say we have two investors: Investor A, who started investing at 20 years old, and Investor B, who started when they were 30. Both start investing with a portfolio worth $5,000 and for the sake of example, let’s assume both portfolios have a compound annual growth rate of 2% and no further contributions are made to their portfolios (for the sake of simplicity).
At age 40, what will their portfolios be worth?
By that time, Investor A’s portfolio will be worth $7,429, while Investor B’s will be worth $6,094. Just by starting 10 years earlier, Investor A has a $1,335 leg up. Now imagine how much wider that gap would be if they continued to inject more capital into their portfolio and reinvested the bulk of their earnings during those 10 years.
By the time Investor B starts, Investor A’s gap will be even wider.
Extra time, if used effectively, can make a world of difference in investing. Every additional year investors grant themselves means more time to make the most of compounding and re-investing. Investors who start later can still catch up, but every year they forego their investing careers will make it that much harder to do so.
Because of the power of compounding done over a long time, investors who start with relatively modest portfolios can go on to have very large and complex portfolios one day simply by investing early and making the most of the time they have.
Minimize the Effects of Volatility and Major Losses
One of the frustrating realities all investors must live with is dealing with occasional bouts of volatility (which, fortunately, can be successfully navigated). Whether it’s a prolonged slump or a full-blown market crisis, volatility and the chaos that follows come from all sorts of possible sources, seemingly out of the blue.
It’s never a matter of if, but when these periods of volatility will strike. To make matters worse, volatility can leave a very deep hole in a portfolio’s market value, and there’s no saying when that lost value will be regained, if ever.
Additionally, during these chaotic times, some investors get antsy and decide to sell certain investments, only to do so at very steep losses (remember, before deciding to sell there are some important considerations to keep in mind).
Fortunately, even the most severe bouts of volatility or the steepest losses can be recovered from. The caveat is that it takes time for this recovery to happen, which can range anywhere from a few weeks to several years, depending on the severity.
Some investment advisors warn older clients, such as those nearing retirement, to stay clear of investment instruments that can be subject to volatility, such as equities. A major reason is that should those investments experience a sharp decline in market value, these older investors may not have enough time to recoup those losses, especially if they plan to sell soon.
By investing early, investors give themselves plenty of room to recover from severe bouts of volatility or to recoup steep losses. On the flip side, investors who start later may find themselves pressed for time to recover from such losses.
More Time to Improve and Learn From Your Mistakes (As Well as Learning From the Mistakes of Others)
We’ve previously discussed investment mistakes and how, despite the frustration and cost that often comes with them, are a source of invaluable lessons. While learning from their own mistakes is important, investors can also learn from the mistakes of others, saving them precious time and money in the process.
If an investor wants to stay at the top of their game throughout their career, then they must set aside enough time for personal improvement. Whether it’s reading, listening to other investors, or studying their mistakes, there are all sorts of ways investors can remain sharp and effective.
Taking the time to improve and learning from mistakes are important tasks, but due to their importance, they should not be rushed.
Investors can’t possibly hope to dramatically improve or thoroughly learn from their mistakes in a single day. Even if they could, chances are the quality of this self-development would be very poor.
Because investor development is a major endeavour, it’s something that’s best done by consistently working on it little by little over a long time. By investing early, investors give themselves plenty of time to make improvements based on their experience, make some mistakes here and there, and learn from it all without feeling rushed.
No Need to Rush Your Investing Career, but Don’t Drag Your Feet
After going through some of the benefits of getting an early start, it’s clear that there’s a strong case to be had for investing early. The common theme tying all these benefits is time, or more specifically, making the most of this limited resource.
With this in mind, prospective investors must learn to strike a delicate balance.
On one hand, we talked about how investing early is sensible assuming an investor-to-be is ready to start. Attempting to start your investment career when you’re in no position to do so probably won’t end well.
On the other, just because prospective investors don’t need to rush doesn’t mean they can afford to drag their feet when it comes to their preparation. It’s still in an investor’s best interest to start as soon as they can without delaying any further, otherwise they risk losing precious time in the process.
Now, there’s no one-size-fits-all answer to the question “When is it considered the right time to begin investing?” This is something all investors must discover on their own.
However, after having discussed the dangers of investing too early, as well as the benefits to be had by investing early, prospective investors need to keep this balancing act in mind before deciding to finally start.
Wrapping Up
Investing too early may be problematic, but that doesn’t mean investing early is a bad thing. Investors who get an early start may reap certain benefits that may put them ahead of those who start later.
Many of the benefits of investing early revolve around time, or more specifically, making the most of it. Time is a non-renewable resource, so it’s in investors’ best interest to maximize the time they have available.
Investing early only makes sense if prospective investors feel they’re ready to begin. With that being said, prospective investors shouldn’t drag their feet either and should begin as soon as they feel ready to do so, otherwise they risk losing the one resource they cannot get back.
