‘Compound interest is the Eighth Wonder of the World. He who understands it earns it’ – Albert Einstein. ‘My wealth has come from a combination of living in America, some lucky genes, and compound interest’ – Warren Buffett. Time is your jackpot!
’Affluent millennials are economically optimistic but afraid to invest’ (Investopedia survey 2019). 64% said saving for retirement was their biggest priority but 40% expected to work beyond retirement age. Only 37% felt knowledgeable about investing and despite having time on their side, invested cautiously, even more cautiously than Gen X in the stock market (37% vs 47%). Nearly 65% trusted financial advisors and were twice as likely to report better investment performance. Those more knowledgeable about investments were twice as likely to have a financial advisor.
The fundamentals are simple − higher returns, lower fees, contribute more, and for longer.
Risk and returns
The riskier the asset class, the higher the return, but with greater volatility. ‘US$100 invested in the S&P 500 in 1928 would be worth more than US$500 000 in 2019 but in Treasuries, a mere US$8 000’ said Investopedia. Being ‘recklessly conservative’ at an early age is ‘safe’ in the short term but at a huge cost in the long term.
Is the volatility worth it? Yes, if you have time, patience, and do not panic.
Schroders found that over the last 19 years (MSCI Global Index since 2001) you made:
- 6,1% per annum staying invested the whole time
- -0,9% per annum if you missed the 30 best days
The more regular the contributions, the more you phase in through market ups and downs.
ETFs and the like provide low-cost solutions with the ability to balance asset allocation. Online platforms are relatively cheap. Robo advice is great for starting up. Reducing fees from 2,5% to 0,5% over 40 years means being 60% better off in retirement. But remember, ‘Dr Google’ and ‘cheap’ advice have hidden costs.
At 7% growth, for every R1 million by age 67 you only need to invest R330 per month from age 25 versus R1 045 per month from age 40. Invest R5 000 per annum from age 25 rather than waiting to age 35 − the extra R50 000 could be worth an extra R500 000+. Start saving yesterday.
Expenses and preservation
That extra R50 000 on the top-model car could cost you R287 000 (30 years at 6%) at retirement. Is that worth it? Compounding has the same but opposite effect on the opportunity costs of not investing. Have liquidity to deal with short-term cash flow crises. Have insurance cover for when ‘life happens’ − protect your wealth creation ability and keep your investments in the market.
Let your money work while you sleep
- Focus on what you can control
- You can’t control governments, economies, wars or pandemics
- Start investing as early as possible
- Invest regularly – better to start small than too late
- Don’t be ‘recklessly conservative’ – you have time to ride out market volatility
- Avoid timing the markets
- Have liquidity for short-term crises but leave the long-term ‘pot’ to grow
- Educate yourself and seek expert advice – a financial plan, investment options, managing behaviours and insurance
- Consider the opportunity costs of compounding unnecessary expenses or luxuries
- Be patient and be bored!