At least once a week I get told by someone that they are thinking about investing (whether passively or actively), but they are not ready to start yet. The majority of people I talk to are actually pretty knowledgeable and are in a position to invest. So why are they not investing? I think the answer is for multiple reasons: analysis paralysis, bandwidth, or just simply failure to pull the trigger. Regardless of the reason, the delay in investing actually creates a compounding effect impacting one’s potential ability to reach the full investing benefit.
The easiest way to understand this is by looking at the Rule oF 72. The Rule of 72 calculates the time it takes to double your investment. Mathematically, you take the expected interest rate and divide it by 72 to get the number of years for your investment to double. For example, if you expect to get an 8% return, you would take 72/8 which equals 9, meaning it will take 9 years for your investment to double.
So let’s say you invest $50,000 when you are 20, with an investment kicking off 8% interest, at 38 your investment will grow to $200,000, at 47 $400,000, at 56 $800,000, and 65 $1,600,000 (as long as you reinvest your initial investment’s returns). Whereas, if you wait to start at 30, and let’s say you have a better rate of return at 9%, starting with the same initial investment of $50,000, at 38 you have $100,000, at 46 $200,000, at 54 $400,000, at 62 $800,000 an at 68 $1,600,000. In other words, even with a better rate of return, starting later can influence when you achieve the same end result.
I recognize this is an extreme situation, and one can easily find investments that yield higher returns. My response to this is if the individuals are hesitant to invest in the first place, the likelihood of that same individual waiting to invest later and then pick an investment with a higher risk profile (which often comes with investments that yield higher returns) is possible, but maybe not as likely. Thus, if someone wants to invest in a more conservative investment, but still be able to grow significant wealth, investing early is the solution!
What were your hangups when you first started investing?
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