Superannuation is a crucial part of Australia's retirement savings system, designed to provide financial security…
If you’re eager to kickstart your journey to financial success, there’s one simple rule to live by – invest early, invest wisely.
Picture this: a life where you have the freedom to pursue your dreams, make confident financial decisions, and enjoy the peace of mind that comes with a secure future.
Well, that life could become your reality, and it all starts with getting a head start on investing.
Here are 5 answers to the question “Why is it important to invest from an early age?” that’ll have you reaching for your wallet faster than you can say “compound interest”.
Power of Compounding Interest
Compound interest is like the secret sauce that can supercharge your savings account and propel you toward financial freedom. Imagine your money not just growing, but multiplying over time. Make your money work for you – a powerful concept that can work wonders for your long-term financial goals.
What Is Compound Interest?
Compound interest is the interest you earn on both the initial (principal) amount of money you put in and the accumulated interest from previous periods.
Unlike simple interest, which only earns you a return on your initial investment, compound interest takes things up a notch by reinvesting your earnings, allowing your wealth to snowball over time.
How Does Compound Interest Work?
Compound interest is quite simple to calculate: Your new balance is equal to the principal times the interest rate. Using a compound interest calculator, here’s how it works.
Let’s say you invest $10,000 with an annual effective interest rate of 8%. After the first year, your investment would be worth $10,800 ($10,000 x 1.08). By the end of the second year, it would grow to $11,664 ($10,800 x 1.08).
Fast forward 25 years, and that initial lump sum of $10,000 would be a large sum of $68,485—all thanks to the magic of compound interest.
The real beauty of compound interest is its ability to make more money over time. As your investment grows, so does the amount of interest you earn, creating a compounding effect that can significantly boost your returns.
Recovering from Market Downturns
Market volatility and downturns are natural occurrences in financial markets. Even seasoned investors may find them overwhelming and difficult to navigate.
Understanding that economic conditions change over time is an important aspect of making effective long-term investments.
While they may pose risks and temporary setbacks, they can also provide chances for investors to purchase assets at lower prices and potentially profit from future recoveries.
What are Market Volatility and Downturns?
Market volatility refers to the rapid and severe price variations that financial markets, such as the stock market, experience over a short period of time. It is a measure of the financial market’s uncertainty and instability, causing prices to rise and fall rapidly.
Downturns, on the other hand, are defined as times in which the general market suffers from a sustained decline or negative trend. Prices of securities and assets often fall during a market downturn, which can result in widespread losses for investors.
Economic conditions, geopolitical events, investor sentiment, and market trends can all have an impact on market volatility and can spark downturns.
Why Invest Early?
Investing early provides a longer time horizon for investments to grow and recover from market downturns, increasing the possibility for higher returns. Historical trends show that financial markets tend to experience overall growth, surpassing temporary downturns.
Plus, when you start investing early and consistently invest a fixed amount regularly, you can benefit from Dollar Cost Averaging. This approach offers several benefits:
- It helps mitigate the impact of market volatility. By consistently investing a fixed amount, you buy more shares when prices are low and fewer shares when prices are high. This helps to average out the overall cost per share over time.
- It removes the need to time the market, which is notoriously difficult. Instead of trying to predict the best time to invest, dollar cost averaging allows you to consistently contribute to your investment portfolio, regardless of short-term market fluctuations.
Over the long term, this strategy can potentially lead to smoother returns and reduce the risk of making poor investment decisions based on short-term market movements.
Diversified Investment Portfolio
Let’s dive into the importance of building a diversified investment portfolio and why starting early could give you the upper hand.
What is Diversification?
Imagine spreading your financial eggs across a number of investments rather than placing them all in one basket. That is what we mean by diversification and it is an effective risk management strategy.
By creating a diverse investment portfolio, you can essentially lessen the impact of the performance of any one investment on your total financial situation. You can lessen the chance of being significantly impacted by the ups and downs of any one particular market or industry by diversifying your assets over many asset classes, industries, and geographical locations.
Why Diversify Early?
When you start investing early, you have the opportunity to gradually build your diversified portfolio, bit by bit, just like adding one piece to a puzzle at a time.
You can afford to take a long-term approach, which means you can carefully choose a variety of investments that align with your risk tolerance and financial goals.
You can explore short-term investments with fixed interest rates like cash and bonds, or long-term investments like real estate. Plus, you can consider pursuing higher returns with more risk in volatile investments such as shares, index funds or mutual funds, or even venture into emerging markets which could potentially have a better chance of providing favourable returns over a longer time horizon.
As you gain more experience and your investment knowledge grows, you can continue expanding and adjusting your portfolio to maintain that sweet balance of diversification that will weather the storms and set you up for long-term success.
It’s always wise to complete your research and seek the advice of an experienced financial adviser who can help tailor an investment portfolio suitable for your needs, goals and risk appetite.
Developing Good Financial Habits
When you invest early, you’re not just planting the seeds for financial success; you’re also cultivating the fertile ground of financial discipline. Investing early requires a certain level of commitment and self-control that sets the stage for lifelong financial well-being.
When you develop good financial habits early, they become ingrained in your daily life. You start making smart choices about budgeting, saving, and spending wisely. You become more aware of where your hard-earned money goes and how it can work for you.
Investing early is like a workout for your financial muscles. It teaches you the art of patience and delayed gratification. It trains you to resist impulsive spending and focus on your long-term goals. It instils in you a sense of responsibility and accountability for your financial future.
Benefits of Good Financial Habits
Developing good financial habits early sets you on a trajectory of wealth accumulation. By practising consistent saving and investing, your money grows exponentially over time, generating returns upon returns.
Developing good financial habits early enables you to lay the groundwork for financial freedom. You gain control over your finances, eliminate debt, create a sustainable financial lifestyle, and be better equipped to handle unexpected challenges.
You create the foundation of a lasting legacy by cultivating good financial habits early. You set an example for a positive financial culture with the young people in your family.
Potential for Higher Returns
If you check the history of the share market, you’ll notice it has a fascinating trend. Over the long run, it has demonstrated an upward trajectory, with periods of growth that outweigh the downturns.
With this knowledge, historically, investors who have stayed invested over the long term have reaped the rewards of market growth.
One of Australia’s most significant and well-known financial markets is the securities or stock market. It serves as a significant source of finance for Australian businesses and is where the majority of household retirement savings are invested, according to the RBA.
The RBA also confirmed that a daily average of $5 billion worth of shares are traded. The majority of big, well-known businesses in Australia, including the top 4 banks, resource industries, and major retailers are listed on the Australian Securities Exchange (ASX). They contribute significantly to Australia’s output and employment, demonstrating the significance of the link between the market and actual economic activity.
Starting early and staying the course can be a wise strategy because you give yourself greater exposure to the market’s growth potential over the long term. Your investments have a longer time horizon to weather the inevitable fluctuations and capitalise on the overall upward movement of the market.
Starting early could allow you to tap into the possible magic of compounding as you reinvest generated returns, generating even more returns. Over time, compounding has the potential to show you its worth by multiplying your wealth and accelerating your path to financial success.
But that’s not all. When you start early, you have the opportunity to ride the waves of innovation and progress. Think about it – as you invest early and diversify, you position yourself to benefit from the growth of particular industries, emerging technologies, and global advancements.
Starting to invest at a young age can be a powerful strategy for financial success. Through compounding, your investments can grow exponentially over time. Early investing can also provide a buffer against market downturns, allowing for potential recovery and long-term growth.
Additionally, it can enable the building of a diversified portfolio, cultivate good financial habits, and offer the potential for higher returns over a longer time horizon. By seizing the opportunity to invest at an early age, you could set yourself on a path to achieve your financial goals, watch your wealth flourish, and create a limitless future of prosperity.
If you haven’t started investing yet or are unsure of what your investment options are to get started, why not try what many investors have done? You can seek professional advice from an experienced financial adviser and take advantage of their knowledge to build wealth.
Ready to Build an Investment Portfolio?
While investing can seem complicated and time-consuming, it doesn’t have to be that way with knowledge and expert guidance. Whether you’re young or old, it’s never too late to start investing for your future.
Need investment advice? Newcastle Financial Planning Group is here to help you tailor your investment plan and build your portfolio. Our financial advice team can help you establish direction for your investments to achieve your financial and lifestyle goals.
DISCLAIMER: The views expressed in this publication are solely those of the author; they are not reflective or indicative of RI Advice Group’s position and are not to be attributed to RI Advice Group. They cannot be reproduced in any form without the express written consent of the author. This information (including taxation) is general in nature and does not consider your individual circumstances or needs. Do not act until you seek professional advice. Newcastle Financial Planning Group, Central Coast Financial Planning Group, Sydney Wealth Advisers, Coastal Advice Port Macquarie and Coastal Advice Ballina Byron are subsidiaries of Coastal Advice Group Pty Ltd which is a Corporate Authorised Representative of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429.