Why you should start investing early

Six reasons why you should start investing early

1. To put time on your side

When it comes to building wealth, your greatest asset is time. The earlier you start investing, the longer your money has to compound and grow. Interest is like a snowball rolling down a hill: it gets bigger and bigger over time. Starting to invest early will give your money more time to multiply: rather than investing huge sums over a short period of time, you can save bite-size amounts and reach your target by allowing your money to grow slowly (and substantially) over several decades. This happens thanks to the power of compound interest (more on this later).

If you’re panicking that you waited too late, here’s the good news: you can start investing now. Regardless of where you are in life, it’s never too late to start investing. The first step is to make a financial plan that will set out a path toward reaching your retirement savings target by the desired age. That way, you’ll have a concrete, actionable plan to put in place and make up for lost time.

2. To combat inflation

Inflation is a continuing increase in the purchase price of products and services over time. Through the years, inflation will erode the value of a country’s currency. There is an assortment of factors that affect inflation. For individuals, dealing with inflation may mean stretching a static paycheque even further to cover these rising costs each year. It’s why some employers offer an annual across-the-board 1-2% “cost of living” salary increase for their employees. But for investors, combatting inflation may mean continuing to see gains by adding to their retirement portfolio.

In most cases, stocks offer a pretty fair possibility of keeping up with inflation. However, you have to remember that not all stocks are created equally. For instance, high-dividend-paying equities often get pounded hard during periods of inflation. One example of this is fixed-rate bonds. You should really be focusing on companies that are able to successfully pass their growing expenses on to their potential customers. An example of this is companies in the consumer staples sector (products that are necessary for everyday living, like food).

The bottom line here is that you should be investing early and often to help combat inflation. As the cost of goods and services increases, the value of our money goes down. Keeping broadly-diversified stocks in your portfolio will help you stay ahead of the curve.

3. To benefit from the magic of compound interest

Time alone won’t make you rich. If you stash cash under your mattress, it doesn’t matter how long you save – your piggy bank can’t keep up with inflation and the cash loses value over time. That’s where the magic of compound interest comes in.

Suppose Person A starts saving $300 per month at 20 years old and stops saving that monthly amount at 30 years old, allowing the money to sit and grow. That’s 10 years of active saving.

Person B starts saving that same $300 per month but starts at 30 years old and ends at 65 years old. That’s 35 years of active saving.

Assuming an annual rate of return of 7 percent, who will have more money at age 60 as a result of compound interest? Let’s look:

Although both people saved the same $300 per month, Person A will end up with 7% more, or more than $34,000, in their portfolio at the end. What’s shocking is that Person B saved $300 per month for 35 years, whereas Person A only did this for 10 years. That’s the power of compound interest when you start investing early.

This is the secret to financial prosperity that most people are oblivious to. They think they can make up by saving more at a later age. But by giving less time for compound interest to work its magic, their final wealth won’t be as high.

4. You can take more risks early on

During your youthful years, you can afford to take informed risks in promising ventures. But as you near retirement, you cannot afford to take this risk because you won’t be able to replace your lost savings.

If you’re younger, you may be able to afford to take on a more aggressive portfolio. Alternatively, if you’re nearing retirement, you may have to go with a more conservative portfolio, which means your probability of high returns is limited.

Somebody that’s investing conservatively is trying to protect their principal (their existing funds). They also prioritize this over maximizing their returns. Often, this investor keeps a risk tolerance that is rather low. Put simply, these individuals are okay with giving up potentially greater returns for more steady returns. And due to this fact, they realize they’re unlikely to deal with plunges in the market that can make them worried and reactive.

Someone who is ultra-conservative might invest entirely in a mix of bonds. If they’re moderately conservative, it might be an 80/20 or 70/30 mix of bonds to stocks. While this is great for avoiding risk, it’s not going to help you maximize gains.

An aggressive investor, on the other hand, is someone who is not afraid to take on risks or is young enough to be able to bear the ups and downs of the market. They realize that over time, their portfolio should balance out, and they’ll maximize gains this way. An aggressive portfolio would be either entirely in stocks (100%) or a 90/10 stocks-to-bonds ratio.

Alternatively, there’s a more balanced approach, where you could do something like 60/40 either way (bonds/stocks or stocks/bonds). Again, if you’re investing early, though, I recommend a more aggressive approach to maximize profits and take advantage of the time you’re spending investing.

Luckily, with the rise of robo-advisors, it’s easier than ever to build a diversified, balanced portfolio that works with where you’re at. A robo-advisor can help you build a portfolio that matches your risk tolerance. By answering a few simple questions about your age, financial goals, and risk tolerance, a robo-advisor like Wealthsimple will build a portfolio of low-cost ETFs.

5. It allows you to chart your future

Investing early will give you total control of your financial future. When you start investing early, you’ll have the flexibility to create a financial plan, build a budget, and choose investments that are higher risk but have higher rewards (more on this below).

If you start late, you won’t have such flexibility. Since time is shorter to retirement, you’ll need to make smart financial choices, save more, and live with a tighter budget. You may have to invest more aggressively in order to reach your financial goals.

So, investing early gives you more control to map out your future – and this is done by the beauty of how your investments ebb and flow over time. As I mentioned above, stocks are going to go up and down over the course of time, but as history shows us, a well-diversified portfolio should allow us to maximize gains in the long run.

By investing early, you can limit the worry of these market fluctuations and instead focus on building a plan for your financial future. Personally, one of the things I’ve enjoyed over time since I started investing in my twenties is the ability to pick stocks and test out some ideas, as well as take some risks. Remember, if you wait too long, your ability to do this will be much more limited.

If you find a really good discount brokerage firm, you can do this without spending a ton of money either. Using an online broker that doesn’t charge a lot in fees allows you to move money around into different stocks and figure out what works best for you.

6. Investing in your twenties (or at any age) has never been easier

As we mentioned, it’s never been easier to start investing early. Gone are the days when you have to go to a physical branch, meet with a financial advisor, and have them carve your financial future for you. You can still do that, but it’s more expensive and offers you less control. It’s why many Canadians are breaking up with their financial advisors and going with a robo-advisor instead.

With the rise of AI-powered robo-advisors like Wealthsimple, there’s no excuse not to start investing now. Even if you have no idea what you’re doing, a robo-advisor can guide your investments for you, both quickly and efficiently (and at a very low cost). Many robo-advisors leverage low-cost index funds to build out their portfolios. This is a great thing because these funds outperform actively managed funds about 80 to 90 percent of the time.

In fact, there was a study done by Richard Ferri, CFA and Founder of Portfolio Solutions®, and Alex Benke, CFP® and Product Manager at Betterment, where they investigated the performance of index fund portfolios and actively managed funds. The results were astounding: they found that diversified index funds invariably came out as winners over actively managed funds 82.9 percent of the time. The duo published their research findings in the Journal of Indexes in July 2013.

On the other hand, if you’re looking to do some DIY investing, you can sign up for a low-cost online brokerage like Questrade. With free ETF purchases and a plethora of free resources for research, Questrade is our favourite online brokerage for investing.

Whether you choose a robo-advisor or an online brokerage for a more self-guided approach, you’ll save a lot of money (versus paying a financial advisor). It pays to start investing early – and it has become incredibly simple, too. Just sign up for Wealthsimple or Questrade in a matter of minutes and start building a portfolio that suits your needs.

Summary

As you see, investing early is critical for your long-term financial success. If you’ve already missed the boat and didn’t invest in your twenties, jump on board now to start building your nest egg. Just remember that every day that passes is another opportunity for your wealth to compound – and you don’t want to miss out on that.

I can’t stress enough the value of leveraging the promotional offers we’re giving for both Wealthsimple and Questrade. If you’re going with the robo-advisor route, Wealthsimple is our choice for the best robo-advisors in Canada, and you can read all the reasons why in our Wealthsimple review.

If you’re brand new to investing, check out our guide on how to start investing and how to buy stocks. If you’re a bit more experienced and you’re ready to begin, review our guide on robo-advisors and discount brokerage firms in Canada.

Ultimately, investing early will give you the financial freedom to make a conscious choice about whether working after retirement is for you – instead of being forced back into the labour force because you ran out of funds.