The power of long-term investing
Author - Jonathan Pollock
Structure
Many of my friends in their twenties come to me and ask, “what good financial decisions can I make to benefit me long term?”. I always respond with “start saving your money early and develop the habit of saving money every month”. It’s the hardest thing to learn in investing but if you can learn it at a young age, it will allow you to have more options in the future for your retirement.
In our grandparent’s generation, you would work for forty years for the same employer, on the final day, be given a Rolex watch and a final salary pension. Today, my generation, are likely to work for over fifty years, have many employers, and retire with many pension pots. The world has changed and that means your financial planning needs to change with it.
If you save £200 every month for forty years, and invest it with a 4.5%* annual return, you will have an investment pot worth £269,000, based off a £96,000 contribution. In comparison, if you increase those returns to 7.5% per year, with the same contribution and time horizon, your return will be £608,500. Albert Einstein once said that “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t……pays it.” And when I explain these examples to my friends, the effect of good financial returns could have life changing impact on your retirement.
You have three main variables in investing:
- Money in - Amount you invest
- Investment Strategy - What are your investments
- Time invested – length of time you have been invested
This is what I remind my friends when it comes to investing. Many of them worry about short term returns and think that saving a few thousand pounds see large growth in their investments. The first five to ten years of investing is focused on building a large amount of money that will benefit from compound returns. Why? 10% of a £10,000 is £1,000. 10% of a £100,000 is £10,000.
So, to summarise, compounding your wealth takes a long time and the potential to make your most returns is in your later years. Secondly, saving your money is the hardest discipline to learn, but if you stick at it, you can get good results.
If you want help understanding the principles of investing and compounding, please get in touch via jonathan.pollock@sjpp.co.uk or +44 7527275684.
The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.* These figures are examples only and they are not guaranteed - they are not minimum and maximum amounts. What you get back depends on how your investment grows and the tax treatment of the investment. You could get back more or less than this.
Although the content of the article was correct at the time of writing, the accuracy of the information should not be relied upon, as it may have been subject to subsequent tax, legislative or event changes.
