This article was written in collaboration with ShareInvestor. All views expressed in the article are the independent opinions of DollarsAndSense.sg
As you get older, your priorities in life will change. In your 40s, you are no longer just providing for yourself, but also your parents and children. You also have to start preparing for your retirement.
Starting your investment journey early could do wonders to your portfolio many years down the road. Here are four opportunities you miss out on when you only start investing in your 40s.
#1 Compounding Effect
Time is money. Added years give your investments more time to grow. This is through the power of compounding returns over the years.
Compounding is the effect of reinvesting the money you put into an investment as well as the earnings you received from the original investment. The longer you invest, the more you can expect to earn.
This chart from Business Insider shows the edge starting young gives you over your peers.
Source: Business Insider
Looking at this exponential graph, the more time you give your investments, the more you can expect to earn from your original investment. Even if you double the amount put into your investments at age 35, you will be unable to achieve the same end result at age 65 compared to someone that started 10 years earlier (at 25) with half the investment sum.
#2 Riding Out Market Volatility
The stock market goes in cycles. There are highs and there are lows (think the Asian financial crisis, the dot-com crisis and the sub-prime crisis). These cycles could last for weeks or months and it is nearly impossible to know when exactly is the top or bottom.
For someone in their 20s, they can hold their investments and ride out a few rounds of market volatility. However, if you only start investing in your 40s or 50s, you only have about 15 years to ride out the cycles of the stock market before you hit your retirement stage in life.
#3 Being Able To Start Out Small
As a student or a new working adult, it is unlikely that you will have a large sum of capital to invest with. However, you can start investing from as little as $100 to $200. In recent years, investors have been strongly encouraged to invest in monthly investment plans offered by our local banks.
These monthly investment plans (also known as Regular Savings Plans) involves buying a fixed amount of investments every month through dollar-cost-averaging (investing the same amount each month in the same fund, regardless of the price). By investing small and regular amounts, you can slowly generate more wealth without having to constantly monitor the market and be affected by emotions.
At a later stage in life, you often have more funds available to put into investing as compared to someone in their 20s. Starting your investment journey late means that in order to catch up with your peers, you need to have higher returns. To get higher returns, usually a larger capital is required and more risk has to be taken.
#4 Chance To Make Mistakes
When you are just starting to invest, your inexperience and lack of knowledge might cause you to make some costly mistakes. With each mistake, comes experience and a lesson learnt. The earlier you start getting involved in the stock market, the more time you have to learn from your mistakes.
At a younger age, you are at a different stage in life. With fewer commitments and financial responsibilities in your 20s than in your 30s, 40s or older, you are able to take on higher risks with your investments. These costly mistakes might not have as big an impact on your life as compared to losses made at an age where you have to provide for your dependents.
Read Also: Why Financial Planning Is A Young Man’s Game
Better Late Than Never
Ideally, most people would like to get started with investing their money from a young age. With fewer financial responsibilities when you are younger, you are able to invest a larger portion of your income and test the waters of the financial market.
Starting to invest only at 40 years old could be understandable due to personal reasons that prevent you from setting aside cash for investments.
However, it is never too late to get started.