Investing early is important.
Every single website which talked about investing spread this message.
This concept is easy to understand, but surprisingly difficult to pass to somebody who doesn’t have an investor mindset.
“What changes if I invest this year or the next? Maybe is better to wait until the prices are lower.”
Maybe some of them heard about the compound interest and how it works, but for them is nothing more than invest early = make more money.
Nothing groundbreaking, or so it seems.
The compound interest is much more powerful than that, though, and I will show it today with a simulation I prepared.
Imagine to have 2 investors, who both have the same age.
And let’s call them Warren and Gann, like the best investor of all times and a trader who was sure he could predict the markets using astrology.
Warren, age 25, decides to invest in an ETF that is adequately diversified.
He is less wealthy than the guy who inspired his name, so he decides to invest only 100 euro/month, and he keeps going for the next 10 years.
When he is 35, he doesn’t want to add anything at all, but he decides to keep invested what he has already.
In the same moment, Gann, realized that trading and astrology don’t mesh well together, and he decides to invest in the same product that Warren chose 10 year earlier, at the same conditions (100 euro/month) but for a long period of time.
He decides to invest until he is going to be 60, and then retire.
25 years later they meet and decide to check who is richer.
And surprisingly, it turns out that Warren is the winner, with almost 71 000 euro against the 68 000 of Gann.
(Note: to calculate these numbers, I assumed an average annual return of 6%, slightly lower the historical average of the world stock market index).
This result is incredible.
Not only Warren invested less money (12 000 Euro VS 30 000 of Gann) for less time (10 years VS 25), but at the end of the day he ended up richer.
That’s the true power of the compound interest, and that’s why it’s so important to start investing early.
Investing early is giving you the chance to make mistakes here and there, take a break and then start over.
And the right choices that you make earlier in time will become every year better, like a small ball of snow that is rolling until it becomes an avalanche.
Moreover, technology is enabling us to invest even small amounts, such as 100 euro and not paying a lot in commission costs (one example is Degiro, the platform which I currently use and which now allow to buy some ETFs for free once a month).
Investing today is giving you the chance to be lazy tomorrow, if that is your wish.
The more you wait to put your money at work, even a small amount, the more you will have to work to realize your financial wishes and you may be forced to make hard choices, which you could have avoided having a great investing strategy in place.