By now you know that investing means taking risks and losing money. But did you know that you can lose a lot of money by not investing?
That may sound a bit crazy, but it is true: by not investing you can lose money. Investing for the long term can actually yield a lot of money. Money you won't get anyway if you decide not to invest. You might be thinking: but if I can also lose money, isn't investing the same as gambling, where the chance of losing or winning is 50/50? The answer to this question is: no. It is not if you invest in a staggered way for the long term and invest regularly.
Before you start investing, though, you should ask yourself carefully whether you can afford to lose the money. It is important that you save for unforeseen expenses first.
More chance of growth
Back to investing. Looking back a good hundred years, you can see that the stock market (we use the well-known US S&P 500 index as an example) generally tends to grow. There are many more years - 97.2 years to be exact - in which the market was on average on an upward trend. Compare it to the 16 years when the market was down.
So if you invest for the long term, and keep it up (even when things are not going so well for a while), chances are you will experience more gains than losses, if you diversify your investments. That means: in different regions, sectors and in both shares and bonds. It is also important to spread your investments, i.e. keep investing small amounts. This reduces the chance that you start investing at the wrong time.
The earlier you start, the less you need to invest
With this in mind, let's first see how much investing can earn you. Earlier I showed that the earlier you start investing, the less you need to put aside each month. Let's say you want to have half a million - yes, we are dreaming equally big - by the age of 65, and you invest according to Portfolio Heet at Peaks (the most chosen portfolio). Then, with an expected return of 6.5% a year, the following applies 🙂 .
If you start investing at 55, you need to set aside €3,119 a month to have half a million at 65. If you start at 45, your deposit drops to €1,142 per month and from age 35, you need €544 per month. If you are 25 when you start investing, you will need to set aside €285 a month to have half a million together by age 65. Just look at the picture below.
The calculations show the net return if you invest in an Adventurous portfolio: they include the costs of the index funds and the costs of Peaks. Know that an expected return is not a guarantee. Your investments can yield less but also more than this calculation example shows.
You see: the more time you have, the less money you need to put aside each month. But did you also know that the earlier you start, the less you need to put in total? Take a look:
If you set aside €3,119 every month for 10 years at age 55, you will put in a total of €3,119 x 120 (10 x 12 months) = €374,280. If you start at 45, you will already be putting in a lot less: a total of €1,142 x 240 (20 x 12 months) = €274,080. At 35, a total deposit of €544 x 360 (30 x 12 months) = €195,840 and at 25 it's €285 x 480 (40 x 12 months) = €136,800. Complicated sums, the picture below makes it a lot clearer.
These calculations also show the net return if you invest in the Adventurous portfolio: they include the costs of index funds and the costs of Peaks.
If you did not invest from the age of 25, but instead put money in an old sock for 40 years, you would have to put aside €500,000 / 480 (40 x 12 months) = €1,041.67 each month to reach €500,000.
Not investing could cost you dearly
If you do invest from the age of 25, you will therefore ‘only’ have to set aside €285 per month and €136,800 in total to reach €500,000 after 40 years. Note: it is still investing. Your final value with investing will not be exactly €500,000, but (slightly) more or less than this amount.
Anyway, the main message is that if you start investing at age 25, you need to put in much less in total (about a third) to arrive at the same amount after 40 years. If you put that amount in an old sock, you would only have €136,800!
So not investing will cost you €500,000 - €136,800 = €363,200!
How this is possible? It's because of the return-on-return effect. A kind of snowball effect by which you receive more and more returns on your previously received returns. In the beginning, you don't notice much of this, but the longer you have the time, the bigger the effect is. Be smart and take advantage of it!
Know that investing takes risk and you can lose (part of) your deposit. Also know that past results are no guarantee for the future.
Rosanne
Copywriter, Peaks
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