3 MIN ARTICLE
This Q&A can help explain how investing for the long haul can help put the power of time on your side.
TABLE OF CONTENTS
How can you benefit from investing over the long term?
One of the advantages associated with long-term investing is the potential for compounding. Here’s how it works: When your investments produce earnings, those earnings get reinvested and can earn even more. The more time your money stays invested, the greater the opportunity for compounding and growth. Keep in mind that while compounding, overall, can have a significant long-term impact, there may be periods when your money won’t grow. While there are no guarantees, the value of compounded investment earnings can turn out to be far greater over many years than your contributions alone.
What is the advantage of getting an early start when investing?
By starting to save early, you can benefit from the power of compounding, whereby the earnings of your account earn additional earnings. Over the course of decades, compounding can make a significant difference.
Take the example of two co-workers — Jill and Edwin. They saved the same amount of money in their firm’s retirement plan ($100 a month for 20 years for a total of $24,000) and earned the same annual return (8%). The only difference is that Jill began investing at age 36, and Edwin waited until he was 46. The bottom line: By age 65, Jill had accumulated $131,613, while Edwin’s balance was $59,295. That’s a significant advantage for Jill, thanks to getting an early start.1
Is it a good idea to try to time the markets?
In general, it’s a poor idea to attempt to time the markets. Too often, investors are spooked by a stock market downturn and flee the market. This can lock in losses and prevent investors from reaping the rewards when the market rebounds.
Consider an example of a hypothetical investor who sold stocks during the market downturn of 2008–2009, and then tried to time the market, jumping back in when it showed signs of improvement. An investor who invested $1,000 in the Standard & Poor’s 500 Index at the beginning of 2010 and had the courage to stay put would have realized a gain of $2,897 by the end of 2019. But an investor who missed just the just the 10 best days over the same 10-year period would have ended up with $1,945, for a loss of 33% in value. The more missed “good” days, the greater the impact on long-term results. An investor who missed the 40 best days over the same period would have ended up with $923, for a loss of 68% in value compared to the investor who remained in the market. While you may hear a lot of talk about timing the market, successful investing is more about time than timing.1
Missing just a few of the market’s best days can hurt investment returns
Value of a hypothetical $1,000 investment in the S&P 500, excluding dividends, from 1/1/10 to 12/31/19
Sources: RIMES, Standard & Poor’s. As of 12/31/19. Values in USD.
When is the best time to begin a long-term investment program?
No one has figured out the best time to invest. You can take the guesswork out of it by making a regular fixed-dollar investment, for example, every month or every paycheck. This is called dollar cost averaging. If you’re contributing to your retirement plan, you’re probably already using this strategy.
Because the prices of mutual funds fluctuate, dollar cost averaging allows you over the long term to:
- Buy more shares when prices are lower
- Buy fewer shares when prices are higher
Dollar cost averaging can lower your average cost per share of a mutual fund, but it doesn’t guarantee a profit or protect against loss. You should consider your willingness to keep investing when share prices are declining.
1 Hypothetical results are for illustrative purposes only and in no way represent the actual results of a specific investment.