Investing advice. You see it everywhere you look… It’s like opinions, and you know what they say opinions are like…
“You should be investing!”
“Don’t invest in the market, its too risky!”
“Invest in your future!”
“Leave your money in the bank, it’s much safer!”
“That savings account isn’t going to give good enough returns to retire, you need to be in the market!”
“The market is going down, stay far away”
It’s amazing the polar opposite views that people have when it comes to investing. Who should we listen to? Is it actually risky? When should you start investing? And how much?
In this post, we’ll give you some answers.
What is the stock market?
To start, let’s talk about the overall stock market and what it is. (If you’re not a beginner, you may want to skip down a little)
The stock market is essentially, in a simple term, an exchange where individuals can purchase equity in companies. That equity comes from purchasing stock, which gives you a small piece of ownership in that business.
If you purchase Apple stock, you own a small piece of the company’s equity and build wealth as the company grows.
The fluctuation in Apple’s stock depends on an incredible amount of things, and will fluctuate daily. With that, your ownership will also fluctuate.
Usually, on a quarterly or annual basis, some companies will give dividends to their shareholders which is essentially a share of the company’s additional profits.
Apple pays a 1% dividend on each of their shares every year. For simplicity, if their stock is at $300, they will give a $3 dividend for every share you own. The more shares you own, the more you earn.
So now that we have a basic understanding of what a stock is and what the stock market does, lets talk a little bit about when you should be investing.
Why Should I Start Investing Today?
The answer is pretty simple… realistically, we all should have started investing a long time ago. But like the Chinese proverb says, “The best time to plant a tree was 20 years ago, but the second best time is today.”
Now, anyone can say “invest now”, let’s give some basis behind this.
Over the last 100 years, the S&P 500 has returned on average 7-8%, meaning that your money will have grown by 7-8% a year, on average, over time. For the purposes of this post, we’ll use the conservative 7%.
Yes, there are things like corrections, recessions and depressions that lead to the market going down, we’re even going through one of those times right now in 2020. However, the overall trajectory of the stock market has always been up.
What does that mean? It means that even though the market is going down right now, it’s scary, but it isn’t permanent. Every bear market has been followed by a bull market. (Bear markets are when the market is going down, bull markets are when the market is going up)
Let’s Circle Back to Compounding
Time to backtrack a little and talk about that 7% annual return. Like Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t, pays it.”
Consider you invest $100 in the stock market this year. Your $100 would turn into $107 given the average return of the S&P, this isn’t always the case, but it’s an average, right?
Big woop, $7. Even if it’s $1,000, it’s only $70. Who cares? But compound interest does a fun thing. It benefits you over time. In year two, your account won’t go up to $114, it will increase to $114.49 because you earned 7% on the 7% return of the first year.
I know, $.49, not a good argument. Let’s look into an example below.
You start investing at 25 years old and begin with $200 a month ($2,400 per year).
You invest that $2,400 every year until you are 35 years old.
At that same time you stop, your friend Joe starts investing $2,400 a year until he is 65 years old.
The following graphic shows the returns of you and Joe’s investments from 25 years old until retirement at 65 (assuming 7% market growth per year)
Despite investing $48,000 LESS than Joe, your account grew $94,418.51 MORE than his did.
That’s the power of compounding. Even though you stopped investing when you were 35, you had 10 extra years of compounding than Joe did, and that’s what lead to the large difference between your accounts.
If you kept investing $2,400 a year through 65 like Joe, you would earn $264,994.81 more than your friend Joe.
Yeah, I Admit, There is More to it
Now, there are certainly more things that go into all of this, like fluctuations in the market, fees, dividends, interest, etc., etc. We just want to give a basic understanding of what compound interest is and why it is so important to start investing early.
If you are looking at that example and think there is no way you can afford to put away $200 a month, take a read through our post on how to make a budget and go through our free money cleanse guide! It gives you simple, effective and actionable steps you can take towards saving money.
Investing is scary, especially if you don’t know what you are looking at. Do your research and don’t rush. The market isn’t going away any time soon and there is plenty of time to make money. But if you are ready, the reasons listed here (among others) are why you should start investing today. Don’t be shy, jump in and start earning that compound interest!
Where Can I Head to Learn More?
By far the best book I have found that has laid out investment strategies and their ideologies, while explaining the overall market in simple terms is Unshakeable by Tony Robbins. In the book, he works with the world’s best investors to bridge the gap from the difficult investing ideologies into understandable terms to help people like you and me take action and improve our financial futures.