We are aware of the importance of starting investing early but some of us are unsure how to start.
Sheryl caught up with some of her girl friends at the pub last week.
Someone mentioned about an ex-schoolmate that was apparently doing very well with "investments". They stalked her Instagram account and saw photos of her various overseas trips over the last few months
"Maybe we need to start investing," they all concluded.
So Sheryl went home and did some research on the Internet.
Stocks. Bonds. Mutual funds. Unit trust. Index funds. Commodity trading. Forex. Fixed deposits. REITs.
Where does she start?
And where does she stop?
This is going to be like another full time job.
She was quickly overwhelmed.
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Sheryl also heard about horror stories where people lose their savings through investments.
It is not so easy after all.
If you are like Sheryl and would like to start investing to grow your wealth, there are two important investing principles you need to understand first:
#1 - The Law Of Compounding Works
The Law Of Compounding states that your investment returns will increase exponentially over time.
If you make a regular annual investment of $5000, over 45 years with an average 8% return rate, the savings will grow to over $2 million (refer to diagram below).
The returns would be more than eight times of the amount invested.
Just let that sink in for a moment...
Imagine what you can do with 2 million dollars.
Like many of the world's most successful investors, Warren Buffett regards compounding interest as the single most powerful factor behind his investing success.
"My wealth has come from a combination of living in America, some lucky genes, and compound interest." – Warren Buffett
#2 - There Is No Right Time To Invest
Schwab Center for Financial Research did a study investigating 5 different scenarios where investors have $2,000 a year over 20 years to invest in the S&P 500 Index Fund.
The investor (Perfect Timing) who invested on the best day of each year for 20 straight years finished with $87,004.
The investor (Bad Timing) who invested on the worst day each year for 20 consecutive years actually finished with $72,487.
And the investor who stayed in cash and didn't invest at all finished with $51, 291.
Even bad market timing trumps procrastination:
It does not matter "when" you invest but "how long" you invest.
Even if you made an investment at an incredibly bad timing, if you stay in the market long enough, the Law of Compounding happens and you will still get a healthy profit.