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Length Matters…

Length Matters…
May 09
11:17 2017

“Time is on my side, yes it is.”- Rolling Stones

With the market near all-time highs, it’s tough for some investors, especially new investors, to put money to work. “I’ll just wait for a pullback,” many people think.

And the pullback never comes. The market keeps hitting new highs, and the investor believes he or she has completely missed the opportunity to get in.

Most investors spend a lot of time and effort picking the right stock, fund or investment manager and fret over getting in at the perfect price. But they’re focusing on the wrong thing.

Instead, investors need to focus their energies on getting as much money into the market as early as possible.

For long-term investors, time is the most important element of investing success. Sure, picking some big winners and avoiding losers will help, but the longer investors have to allow their money to compound, the more cash they will end up with.

And each extra year that the money can be left alone to compound pays off in a very big way.

Consider…

If an investor invests $3,000 in the market each year for 40 years and achieves just a 6% annual return (nearly two percentage points below the historical average), the investor will wind up with $492,143.

That same investor who invests for only 30 years would need to achieve a 9.5% annual return, a point and a half above the historical market average and more than 50% higher than the 40-year investor.

Cut the time down to 25 years, and the investor needs to earn about 12.5% per year, more than 50% more than the market average: a very difficult task.

And if the investor has only 20 years in the market, she’ll need to earn 17.5% per year, more than double the market’s historical average: nearly impossible.

Let’s look at it another way. An investor puts $3,000 per year to work in the market and earns the S&P’s 50-year historical average of 7.84% (not including dividends).

The investor who saves $3,000 a year for 40 years and makes an average annual return of 7.84% will have $803,583. The 30-year investor has less than half that amount at $355,909.

Look at the difference those last 10 years made. That’s the power of compounding. If you can keep the money invested just 10 years longer, you make an additional $417,000.

If you’re investing for 25 years, you wind up with $231,056, and in 20 years, you finish with $145,451. Granted, if you’re saving for 40 years instead of 20, you’re contributing an extra $60,000, but the difference in the final amount is more than 10 times that $60,000 investment.

Now, I realize not everyone has 40 years to invest. But let’s take a look at the difference a few years can make.

A Big Difference
Let’s assume you have a starting capital of $100,000 invested in the S&P 500, and the market increases at its historical average of 7.84%.

Let’s also assume that dividends, from where they are today at a historically low 2%, increase by the historical average growth rate of 5.5% per year and are reinvested. No other funds are invested after the initial $100,000.

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