Wednesday, January 25, 2012

Young Investor Series - Why Should you invest in the stockmarket (Part 2)

Earlier in part 1, we have discussed about how inflation has been eroding our wealth, while the stockmarket has proven to generate a much higher return in the long run. Some may say that with the current macroeconomic environment, inflation is not that high and it might be safer to put in fixed deposit with the bank. They will want to wait till they got much older and with more capital before they start investing. While there's nothing wrong with that, the younger one starts, the better one can enjoy the effect of compounding interest. Warren Buffet who started an age of 11 in fact thought that he should have started even earlier.

Using a 6% rate of return (considering historical 9% return for stock index) and 55 years old as the end year with an initial starting capital of $10,000, here are the differences in return:

At 55 years old,

Start at 20 -> 76,860
Start at 25 -> 57,435
Start at 30 -> 42,918
Start at 35 -> 32,071
Start at 40 -> 23,966
Start at 45 -> 17,908

For every 5 years younger that one start, it can equate to a lesser return of $10,000, which is your initial starting capital.

Here's another scenario: Assuming the same condition previously but that one add an additional sum of $1000 every year (Saving up $3 per day).

At 55 years old,

Start at 20 -> Total Sum Invested = $45000 Total Return= $194,981
Return Earned= $149,981

Start at 25 -> Total Sum Invested = $40000 Total Return= $141,237
Return Earned= $101,237

Start at 30 -> Total Sum Invested = $35000 Total Return= $101,075
Return Earned= $66,075

Start at 35 -> Total Sum Invested = $30000 Total Return= $71,064
Return Earned= $41,064

Start at 40 -> Total Sum Invested = $25000 Total Return= $48,638
Return Earned= $23,638

Start at 45 -> Total Sum Invested = $20000 Total Return= $31,880
Return Earned= $11,880

Therefore, the earlier that one starts, the higher the absolute return that one can get.

6 comments :

  1. Too many moving parts. The one at 65 will have a larger invest able amount. But its good to start young and not make any mistake la. I spend six barren years figuring that out look at the compounding loss

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  2. I agree with you on this. but i doubt anyone will want to risk his retirement nest at 65. and I never believe that anyone can start earning returns in the long run without paying some lesson fees. For me, out of my first 10 trades, 9 were losing money. I was speculating about the quarterly profits, listening to rumours,following others blindly and cut losses after I was wrong in almost every single case. But then if I never cut loss and pump my money into another stock, I will not have lost that much(10%) at the start.

    But I am no longer trading now and have exercised much more discipline since joining Value Buddies, managing to reverse most of my losses now.

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  3. Great post, really spot on. Most young people simply do not realize the concept of compounding. Just from your post, consider that there is a 48,000 difference just between starting at 20 versus 25, its amazing what compounding can do.

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    Replies
    1. I have to say I am lucky to have started young :)

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  4. Hi,

    I agree with starting young. The problem is in Singapore, there is no reinvestment program for most stocks. Hence you would have to incur slight brokerage charges when using dividends to buy more stocks. The upside is that capital gains in Singapore is almost to the bare bones.

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    Replies
    1. The rather high charges can be daunting when considering reinvesting the small amount of dividend. While capital gain might not be as much as what one can get in other countries, the potential losses that one face will be lesser too.

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