February 19, 2013

I was asked the other day, "what is the best advice you'd give someone with regards to investing?" My first thought was to say something that sounded intelligent and would make a good impression. After a second, I thought better of that and answered simply, "Start." They were taken aback and replied, "Start? That's it, just start?"

Yes: start.

Let's consider two scenarios:

Client 1 is 25 years old, just beginning his career. Over the next ten years, he invests $5,000 each year. If we assume an annual return of 7.5% (not unreasonable in a growth-based mutual fund), by age 35, Client 1 has $70,735 in his account. At this point, he stops saving, but leaves his account alone to let it grow to age 65.

Client 2 is 45 years old and decides that if he wants to retire anytime soon, it's time to start saving. Over the next 20 years, he saves $10,000 each year. Assuming the same 7.5% annual return, at age 65 his account value grows to $433,046. Not bad!

Now, let us compare.

    Client 1 Client 2
Age started saving   25 45
Amount saved per year   $5,000 $10,000
Saving period   10 years 20 years
Total investment   $50,000 $200,000
Growth Rate   7.5% 7.5%
Account Value at age 65   $619,281 $433,046

Client 2 saved four times as much as Client 1, and for twice as long. You'd think Client 2 would be the winner in this scenario, but the numbers don't lie.

When is the time to start?

Chuck Wade

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).