When to start investing?

Patience is its own reward. But patience also rewards investors.

You don’t need a lot of money to begin investing. By making small regular contributions over time, you might be surprised by how quickly your investments accumulate.

Investing the same dollar amount at regular intervals can help smooth out the ups and downs of the market. Investing the way means you purchase more shares or units when prices are low and fewer when prices are high.

It’s important to start saving as soon as you can. The longer your money is invested the more you can take advantage of compound interest.

The cost of delay

The above chart shows how substantial a difference investing early can make. It compares the final size of the investment pools of two investors: one (portfolio A) who invests $100 each month over a 20-year period starting in July 1987; and another investor (portfolio B) who starts 10 years later in 1997 but tries to catch up by investing $200 per month for 10 years.

Both invest a total of $24,000 but because the first investor started earlier they have over $33,000 more than the later investor after 20 years.

‘Time-in’ not ‘timing’

Patience is its own reward. But patience also rewards investors.

Most of the long-term gains on equity markets are made or lost in just a few trading days each year. Take away those ‘big’ days and returns are more like what you would expect from a defensive investment. Investors who lose patience and get out of the market run the risk of being absent when significant gains are made.

Australian shares 1984–2007

If you had invested $1,000 in Australian shares in 1983, 24 years later it would have grown to $21,064 (making an annualised return of 16.5%). If you had invested the same amount over the same time period except for the 10 biggest days you would have just $10,234 (an annualised return of 12.3%).

Markets are unpredictable, so pricing those big days is impossible. Staying invested means you capture the full benefits of the share market. Your returns might be down one month, but by withdrawing from the market you run the risk of missing out on the recovery.