Most investors have heard the saying: “Time in the market beats timing the market.” When it comes to investment outcomes, time is one of the most powerful assets available to any investor.

But many people let this huge advantage pass them by, and then have to work harder later in life, contributing more of their own money to achieve the same investment outcomes as those who start their investment journey earlier.

Here’s what you need to know to change that, whether for yourself or other members of your family.

What stops people investing early?

There are many reasons why young people don’t understand, or make use of, time as an invaluable investment driver. The investment options available to them might not be immediately obvious, or they may not understand the extent of what is possible if they take action. In other cases, it may be because many young people’s income is more limited, or committed to other things. Often, the focus for young people is on other priorities.

But there is evidence that the proportion of young people investing is growing. Financial Markets Authority data shows just 12% of people aged 18 to 29 are not investing at all, whereas about 20% have investments alongside KiwiSaver.

Long-term impact of investing

Albert Einstein didn’t reportedly call compounding the “eighth wonder of the world” for nothing. Compounding returns make a big difference over time. But independent research showed that more than half of young New Zealanders could not define compounding accurately. 

The earlier they understand what it is and how to use it, the better their investment returns.

As the Financial Markets Authority notes here, if you invest $10,000 in an investment paying 4% a year calculated annually after fees and tax, and stayed invested from 10 years, you would end up with an extra $800 just from the effect of compounding returns. And the effect becomes even more pronounced when the investment is over decades.

Young investors don’t need to worry as much about timing it right

Investing early also means that you likely have time to recover from financial mistakes and dips in the markets. People who invest young can usually have a more aggressive risk profile because they have time to navigate market movements in a way that people who start later in life may not.

This can provide a much better outcome over time than trying to time market investments later on.

Someone who invested in the S&P500, between 1930 and 2020, for example, but did not have their money invested on the best 10 days, would have only had a return of 28% over that 90-year period.

Compare that to the 17,715% they would have got if they had remained consistently invested in the market throughout the same period, according to Bank of America data.

The biggest market drops tend to happen before the biggest upswings, and those who wait for the ‘right’ time to buy and sell could easily miss out on the recoveries if they get their timing wrong. Getting in early and staying there substantially reduces that risk.

Lifetime investing habits boost wellbeing

There are other benefits to starting to invest earlier in life, beyond the development of the investment portfolio itself.

People who have a sound financial plan in place are much likelier to achieve their financial goals, and have systems such as emergency funds set aside that will help provide security and peace of mind throughout life. Amassing an investment fund early on creates more options for the investor, boosting overall wellbeing.

Research has shown that people who adopt an investing mindset and improve their financial literacy from a younger age are also less prone to overspending, making it easier to achieve other financial goals. Young people who had opportunities to learn to save and invest could learn more self-control and gain “future-orientation” perspectives, as well as accumulating assets to take care of their future needs and establishing healthy saving and investing habits for adulthood, this 2019 paper in the Journal of Family and Economic Issues notes.

“Having a vision for the future aids in goal setting by providing a direction towards which the individual can focus their attention in the face of competing interests. Setting goals and then establishing action plans to accomplish those goals provides a foundation for realizing one’s financial vision,” the authors wrote.

Ready to talk?

If you have family members who are ready to start investing, or you want to check whether your strategy is still working for your circumstances, get in touch with your SHARE adviser.

A well-planned investment strategy implemented early in life can set investors on the path for real wealth. The best time to invest might have been yesterday, but the second best time is today. Give us a call on 0800 2 SHARE or contact us here.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.