A few weeks ago, I wrote an article about my best investing moves and the worst ones. As investors, we live various experiences and have the chance to learn from them. My fellow blogger ATL at Amber Tree Leaves commented on this article telling he that if could go back in time and start over again, he would immediately start investing with a systematic plan. The idea is to invest, even a small amount of money, on a regular basis. You could do it once a month or, even easier, invest every two weeks at the same time you receive your paycheck. If you choose the latter, it’s like reducing your salary at first, but you won’t feel the difference after a short while. After reading his comment, I thought; this advice is so simple, and it’s the best advice for all investors.
Time in the Market is the Most Effective Investing Strategy
We can spend all day debating about the best investing strategy. Some will tell you passive indexing with ETFs is way to go, some others will choose investing with an advisor and others like me will put their focus on dividend growth investing. The fact is that while I’m a firm believer in my own investing strategy, the truth is that being invested in the stock market for a long time remains the best strategy above all no matter what you do with your portfolio.
Let’s do some math to see how this works in real life. Assume you have $140 to invest bi-weekly. This would make a total of $3,640 per year. It’s not a big amount and it is easily affordable by just about anyone, at any age. I’ve used the Financial Mentor calculator to run several calculations. The idea is to start the scenarios at different ages, and stop at 65 to see how much your portfolio would be worth. I used a 4% investment return as a starting point:
source: author’s table
Data:
| Starting Age | Years Invested | Total at 65 |
| 20 | 45 | $507,810.53 |
| 25 | 40 | $391,898.63 |
| 30 | 35 | $299,322.34 |
| 35 | 30 | $244,379.51 |
| 40 | 25 | $164,272.61 |
| 45 | 20 | $115,777.11 |
| 50 | 15 | $76,933.18 |
As you can see, it makes an incredible difference to start investing at the age of 20 ($507,810.53) vs starting only 10 years later ($299,322.34). In fact, starting 10 years later cost you over $200,000. Unless you are the next Warren Buffett, you will never able to compensate for this 10 years with better investing results. I’ve done some calculations to see what rate of return you need to achieve to compensate for not starting to invest at the age of 20:
source: author’s table
| Starting Age | Investment Return | Total at 65 |
| 20 | 4% | $507,810.53 |
| 25 | 5% | $504,913.29 |
| 30 | 6.10% | $501,553.57 |
| 35 | 7.90% | $509,782.21 |
| 40 | 10.40% | $504,570.31 |
| 45 | 14.50% | $504,410.92 |
| 50 | 21.80% | $502,293.74 |
You may think achieving 6.1% return is feasible if you start at the age of 30 and you are right. However, do you realize that this represents an increase of 52.5% on your original rate of return? And if you think it’s still not the end of the world, maybe you will change your mind if I tell you that if you start investing at the age of 20 and average a 6.1% return, you will reach the $1 million dollar mark at the age of 65 by simply investing your small $140 bi-weekly (total amount is exactly $1,023,697.93).
These calculations show us something that is now obvious: not matter how you invest, if you start early, you don’t need an astronomical rate of return to acheive financial freedom.
Invest Every Two Weeks and Reach Financial Freedom
I’m writing this article mainly because I wish I had read something similar when I was still in University. I would have spent less money on beer and clothing then I would have started investing this magical $140 bi-weekly. Even if I had invested this amount in a balanced mutual funds, I would still reach a 4% investment return over a long period of time and build a solid nest egg.
We all make the same mistake; we think saving money will be easier when we will make more. The problem is that more expenses come with a higher salary. In my early 30s, I was already a homeowner and a father of three. This makes my budget a lot higher and if I hadn’t started saving already, starting now would be extremely difficult. Since you don’t spend what you don’t have, if you invest the money directly into your retirement account right from your paycheck, you will just get used to living without this money.
This is very simple advice, and yet, it is the best you could ever give to a young person.
Time in the market trumps timing the market any time. The reason why I am a few years away from financial independence is because I was always frugal, always saved a portion of my paycheck, and put most of my money in dividend growth stocks over the past 8 – 9 years and the rest in my 401k plan. I never gambled on hot tech stocks or wasted money trying to pick tops or actively trading. I realized early on that I have more control over your savings rate, how much you contribute to investments and what you invest in, than what your future results will be.
A lot of people often switch strategies, chasing the perfect thing that doesn’t exist. It is ironic that the “dumb” way of buying and holding has been superior to the “smart” way of actively buying and selling.
Hello DGI,
I agree with you that the worst investing strategy is probably to switch from one strategy to another this prevent you from fully benefit of the long term horizon.
What do you think of Buffett buying a big techno this morning? Interesting, huh?
Well said: the best way to start investing is at a very young age… I only did partially with my pension investing. I will encourage my kids and nephews to invest early on. I actually hope to have an account ready for them by the age of 20… A little gift
My oldest kids are 8 and 10 and I’m already explaining them how it works 🙂 I hope to get them to invest (through one of my account) when we come back from our trip. If they can start saving an investing now, they will never have any financial problems!
I remember doing similar calculations in my engineering economics class in college. Amusingly, the material shouldn’t have had anything to do with stock investing….. but the professor was a diehard investor. Anyway, I set up dozens of scenarios while in that class….each with a respective spreadsheet. I’ll never forget when I realized that investing $2000 annually from age 20 was equivalent (at age 60) to investing some astronomical amount annually from age 40 onward. The outcomes are of course based on our assumptions, and the “garbage in garbage out” philosophy applies, but still……..
Perhaps I should dust off my old engineering economics book…..
-Bryan
It’s incredible how small amount ($2,000 per year is not even $200 per month!) creates astronomical numbers in the future huh?
I’m still clueless why they don’t show this in high school…
Unfortunately, I didn’t start investing until a couple years ago, and started DGI earlier this year (at 40 yrs old). I virtually kick myself every day that I didn’t start at 20. If I only knew then what I know now!
I’m able to invest $1,000 – $1500 per month now w/ DGI (and also looking at other passive income opportunities to hopefully increase that), so I’m hoping I can at least catch up a little bit.
Hi,
thanks for the nice write-up!
“We all make the same mistake; we think saving money will be easier when we will make more. ”
I totally agree on this one, it is definitely worth it to build good habits early. Makes life easier.
kind regards,
valuetradeblog
Never thought about this concept until my personal finance class senior year where my teacher showed us a graph everyday to make us do it. Thankfully I started at the age of 21 so I have time and am waiting to see the returns so far everything has been largely flat but hey I got multiple years. I like how you point out that money we don’t see is money we don’t miss. We are always under an illusion that we will miss that money yet we always adapt to the situation. Glad I get to read all these articles while I am young!
I totally love the time in the market idea! Totally!
I think the main reason why those who follow this way of invesitng are often successful is that it takes the emotional aspect out of investing. Short term stock performance doesn’t matter when you have a long term view in mind. Sure it’d be better to sell high and buy back when it’s low but countless people have proven that to be pretty hard to do on a consistent basis so why stress about it. The beauty behind is that once you get a decent amount of money in your account – even days and months where the stock market tanks are enjoyable because your dividends are consistently reinvested a
Let it be and grow that money tree!