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Be Wise With Money

The First Rule of Investing: Just Do It

What does it take to achieve your long-term investment goals? Is it the ability to choose the right investments – those destined to go up in value while avoiding those doomed to fall? Maybe it is the ability to determine just the right mix of stocks versus bonds. Perhaps it requires steady nerves – a temperament that lets you stick to your strategy even when the financial markets are volatile. And what about luck and timing?

Certainly all these factors can impact your investment success. But there is another variable that will have a far greater impact: how soon you begin investing. The sooner you start, the better.

To illustrate, let us look at a pair of investors, twin brothers Tim and Tom. The brothers work in the same jobs at the same salary. Both contribute the same amount of money to a retirement fund for the same period of time – 20 years – and both leave their money in their accounts until they retire at age 65. Both earn the same return on their investments. The only difference: Tim starts investing at age 25, Tom at age 35.

By the time Tim stops working at age 65 – see the chart below – he has more than $290,000 in retirement assets. Tom, who invested exactly the same amount, has only about $131,000. That's nearly 55% less. Why? Because by waiting, Tom lost the 10 extra years Tim had for his nest egg to continue compounding.

The benefits of investing sooner rather than later

In the example below, twin brothers Tim and Tom each contribute $24,000 to a retirement account over a period of 20 years, but Tim starts at age 25, Tom at age 35. (Note: Illustrations do not take taxes into account. This example assumes each account earns an annual return of 8% compounded monthly.)

Initial Investment $1 $1
Additional investment over 20-year period, at $100 per month $24,000 $24,000
Value of portfolio at age 35 $18,297 $2
Value of portfolio at age 45 $58,907 $18,300
Value of portfolio at age 55 $130,752 $58,913
Value of portfolio at age 65 $290,223 $130,765

It could have been much worse. If Tom had waited until age 45 to start investing, his portfolio would have grown to just $58,926 by retirement age – 80% less than what Tim accumulates.

To be sure, choosing the right investments also can have an impact on how well your portfolio performs over time. But except in the extreme, those choices can have far less consequence than how soon you start investing and how diligent you are about sticking with it.

Let us suppose, for example, that Tim and Tom both began investing $100 a month at age 25 and kept at it for 40 years. But now we will assume that Tim allocated 70% of his portfolio to stocks and 30% to bonds. Tom is more conservative and allocates 50% to stocks and 50% to bonds.

To see how they would have fared, we will let the Standard & Poor's 500 Index represent their stock portfolios and the Ibbotson U.S. Long-Term Government Bond Index represent their bond portfolios.

Ibbotson Associates, an arm of research firm Morningstar Inc., has calculated that from 1926 through 2013 a 70/30 portfolio like Tim's would have generated an annualized average return of 9.79%. Meanwhile, a 50/50 portfolio like Tom's would have earned 8.71%.1 After 40 years, with monthly compounding, Tim's account would have been worth $593,406, while Tom's would have been worth $429,639.2 That's a difference of about 28% – far less than the nearly 55% discrepancy that resulted when Tom waited 10 years longer to start investing.

In fact, even if Tom had been even more conservative, investing, say, just 30% of his portfolio in stocks, the end result would not have been as negative as it was from waiting 10 years to start investing. With a 30/70 split between stocks and bonds, Tom's account would have been worth $304,133 at retirement, or 49% less than his brother's.

So yes, how you invest your portfolio makes a difference in your long-term investing success. But making an early commitment to investing, and sticking to that commitment, often matters even more.

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