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The advantages of investing early

You may have heard it said, "No risk, no reward." But did you know that time can actually decrease your risk while increasing your reward?

 

Investing: Risky business?

When some people think of investing, they focus on the potential for great rewards—the possibility of picking a winning share that will increase in value over time.

Other people focus on the risk—the possibility of losing everything in a market crash or on a bad stock pick.

Who's right? Well, it's true that all investing involves some risk. It's also true that investing is one of the best ways to build your wealth over time.

In fact, there's typically a direct relationship between the amount of risk involved in an investment and the potential amount of money it could make.

Different types of investments fall all along this risk-reward spectrum. No matter what your goal is, you can find investments that could help you reach your goal without taking on unnecessary risk.

Time is on your side

Here's the secret ingredient that can make investments less risky: time.

But there’s a caveat.

If you invest in just a handful of investments or only within the same industry, time won't necessarily make your portfolio any safer.

The reason it works for diversified investment portfolios that incorporate a range of asset classes (i.e. bonds), regions and markets is that over time, there tend to be more "winners" than "losers." And the investments that gain money offset the ones that don’t do as well.

The more time you have, the more you benefit from compounding

Not only can the passage of time help lower your investment risk, it can potentially increase the rewards of investing.

Imagine you place one checker on the corner of a checker board. Then you place two checkers on the next square and continue doubling the number of checkers on each following square.

If you've heard this brainteaser before, you know that by the time you get to the last square on the board—the 64th—your board will hold a total of 18,446,744,073,709,551,615 checkers.

While there’s no guarantee you can double your money every year, the principle behind this – known as “compounding” – is important to understand that when your starting amount is higher, your increases are higher too. And over time, it can add up to be a material increase.

For example, if you earn 6% on a $10,000 investment, you'll make $600 in the first year. But then you start the second year with $10,600—during which your 6% returns will net you $636. This is a hypothetical example that does not take into consideration investment costs or taxes.

In the 20th year of this example, you'll earn more than $1,800—and your balance will have increased more than 200%.

A caveat: reinvesting is key

If you take your earnings out of your account and spend them every year, your balance will never get any bigger—and neither will your annual earnings. So instead of making more than $20,000 over 20 years in the hypothetical example above, you'd only collect your $600 every year for a total of $12,000.

If you instead leave your money alone, your "earnings on earnings" will eventually grow to be larger than the earnings on your original investment – and that’s the power of compounding!

 

 

 

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Louise Laing

Louise founded Salus Private Wealth to offer high quality personal advice to clients who want to work closely with an adviser for the long term. Her philosophy that understanding each individual and their motivations and needs is key to an enduring and successful financial planning relationship is at the heart of the business.

She first engaged the services of a financial adviser herself when she was in her early 20s (long before becoming one) and believes the non-judgemental support and education about her position and options provided at this early stage has allowed her to make confident decisions in different aspects of life since then.

This confidence and positivity in making choices, financial or not, is what she wants to give to her clients.

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Superannuation is one of the largest and longest duration investments most people in Australia have, making it a critical part of long-term planning even if retirement feels like a distant objective. For those in the lead into retirement, we design strategies so you have peace of mind that when you start to draw on your retirement savings, you have liquidity and stability to support that.

Legislation and rules are changed regularly, so advice can help you take advantage of opportunities to build for the future. We are authorised to provide advice on and to SMSFs.

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While talking about death doesn’t seem like a particularly appealing prospect, it’s a topic we see as a vital part of financial planning. Importantly, it’s a topic for every adult, regardless of their stage in life. Without a proper estate plan assets may not be passed where you’d like them to go, family conflict can ensue, and in the event you lose capacity there may not be an authority in place for the person you would choose to make those decisions for you to do so. While it can be an uncomfortable subject, we are experienced in facilitating these conversations as part of our advice process.

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The Trustee for Laing Weaver Family Trust T/A Salus Private Wealth (Corporate Authorised Representative No. 1305571) and all our advisers are Authorised Representatives of Finchley & Kent Pty Ltd, Australian Financial Services Licence No. 555169, ABN 50 673 291 079, and has its registered office at Level 63, 25 Martin Place, Sydney NSW 2000.

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