Einstein called the phenomenon of compounding interest the eighth wonder of the world. There are plenty of clever sayings that talk about the importance of saving such as, “time in the market is more important than timing the market.” When you put numbers behind that, it becomes a powerful statement.
Let’s say a hypothetical investor begins with $5,000 saves $250 per month for 25 years. If he or she earns an average of 7% after cost, the potential value would grow to $231,145.01 ($80,000 invested). If the same investor waited 5 years and only invested for 20 years, with the other factors staying the same, the ending value would be $150,425.36 ($65,000 invested).
Investing has some drawbacks. Two of the biggest are market volatility and the opportunity cost of investing. Volatility means in order to have a 7% average return, investors will have to endure years with lower and sometimes negative returns. Generally speaking the market has a correction of 10% or more once per year and a bigger move down of 20% or more roughly every four years. Even a well-managed and diversified portfolio will see declines in those environments, and that can be difficult to withstand. The opportunity cost is another drawback of investing because saving additional money means there is less money to spend and many people would prioritize taking a more expensive vacation now over saving for the future.
If you have the financial means and the ability to overcome those two common reasons not to invest, implementing the right behaviors can help you build wealth even if you don’t consider yourself financially savvy.
If you are looking for a way to implement your own investing plan like the hypothetical above, consider the Pilot Portfolio Series as a way to start an account with as little as $5,000. For more information visit www.pilotportfolioseries.com.