“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
Albert Einstein (reputedly!)
Take a long look at the graph above. If you were around in 1925 (hello old-timer!) and had just $1 to invest, and you added no new money since that date – over the following 93 years:
- if you’d spent that dollar on a cup of coffee, inflation would have ‘increased’ its value to $13 (in real terms the buying power of the dollar didn’t change), you’d also have a very cold cup of coffee
- if you’d left that dollar in the bank to accumulate interest, you might have around $100 (treasury bills and bonds are different types of government-backed loan, but they’ll usually track broadly closely to central bank interest rates)
- if you’d invested that money in the S&P 500 – an index of many of the largest US companies, you’d have over $6,000
- and if you’d invested that dollar in an index of smaller companies, you’d have $33k
Whether you’re investing in big companies, small companies, or some mix – in the long-term, the stock market has historically delivered consistently superior returns to any other type of investment (you’d have done pretty well in real-estate as well, but for reasons I won’t get into in today’s post, that’s less scalable, and inherently less diversified).
Now nobody reading this post today is really tying up their money for ninety years – but the point of the chart above is that with very few exceptions, you’re going to broadly show the same results over any long-term period that you happened to invest through. If you bought stocks with that one dollar at the absolute peak of the market the day before the September 2008 financial crash, you’d still have $3.80 ten years later.
So it’s easy right – invest in stocks, get rich?
Sadly it isn’t quite that straightforward; there’s a big non-obvious caveat in the graph above, and that’s the need to invest for the long-term.
If you’d invested that dollar in September 2008, then watched the market implode over the following months, like many other experienced and inexperienced investors, you could easily have turned that dollar into 60 cents if you panicked and sold.
Perhaps you were in full charge of your emotions, but something simply happened in your life and you unexpectedly needed access to the money – a new baby, the loss of a job, an unplanned medical bill for a family member (praise be to the heroes in the NHS that we don’t have the looming shadow of a paid healthcare service like our US friends). You had to sell those investments to cover the bills, you didn’t like it, but you still turned a dollar into 60 cents.
On the other hand, if you could wait out the financial crisis and leave that money untouched, you’d be back in the black just a year later. In fact, if you’d continued to contribute new money throughout the whole period of ups and downs, you’d be even better off.
So on to the headline question of this post, “should I start investing?”
Yes.
But there’s an if, there’s always an if, right? – actually this time I’m afraid there are two ifs:
if #1 – you have money that you don’t, even in the most extreme circumstances, expect to need in a hurry; and
if #2 – you’re in charge of your emotions, and can make logical decisions about your investments, seeing beyond short-term results.
It’s no bad thing if your answer to either of those questions is no, it simply means that investing in the stock market is probably not the right answer for you right now.
If you have a short-term savings goal, perhaps a planned major purchase like a new house or car, you have a very good reason to build-up your savings using a short-term investment option. Given current historically low bank interest rates, if you’re in the UK you could probably do worse than to take a look at premium bonds. Of course, you could still divert a little bit of your investable money each month to long-term investments, if only to start to build your experience in the stock market; but with a bigger savings goal in the next few years, it makes sense to devote the majority of your spare funds to that.
Oh and by the way, if you literally have zero spare cash each month, then I’m not going to preach but you may want to have a read around some of the excellent existing resources on saving and budget management – a google search for “pay yourself first” will probably lead you down the right rabbit hole…
Similarly, if you know you’re the type of person who’s driven by their heart rather than their head, and feel you won’t be able to stay committed to your investment strategy as your wealth disintegrates day after day – as it always will during the periods of volatility that are a natural feature of the boom and bust investment cycle – again stock market investing probably isn’t the right option for you; as the Oracle said to Neo, “know thyself”.
So, you’re confident about both of those ifs, and you’re ready to invest, what next?
Well, let’s just recheck that first if hey, what do we mean by “in a hurry”?
At Telescope we consider a sensible long-term investment horizon to be ten years. When we buy stocks frankly we’re planning to hold them forever, but to paraphrase someone far wiser than ourselves, if we wouldn’t consider owning a company for ten years, then we wouldn’t think about owning it for ten minutes.
You might consider five years to be long enough, and you’d probably be fine, but if you can stretch that to ten years the guesswork is largely gone, and we’re confident that a diversified portfolio of high-quality companies will ride-out anything the market can throw at it, beating the returns of any other form of investment.
So maybe investing isn’t right for you, and that’s just fine – but you know who else investing might be right for – your kids (or nieces and nephews).
- they don’t need money in a hurry, right – what are they going to blow it on, sweets and loot boxes?
- they’re probably not in charge of their emotions, but they don’t need to be, you’re managing their money for them!
And you know what else the younger generation have going for them? – time, the most important factor in the whole compound interest calculation that we started this post with.
The real key to [Warren Buffett’s] success is that he’s been a phenomenal investor for three-quarters of a century. Had he started investing in his 30s and retired in his 60s, few people would have ever heard of him.
from The Psychology of Money, by Morgan Housel (@morganhousel)
It’s a rare billionaire investor who’ll be in the stock market for 93 years, but you have a better chance of that if the journey starts in pre-school…
So, should you start investing?
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