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Learning to invest can feel like reading a giant, esoteric tome. The more you study it, the more you realize that you have to learn new jargon and Greek letters. And where did I put my old TI-84 again?
This article is not that.
Instead, take a look at the following three charts. Each illustrates an important lesson that, when internalized, will hopefully make you a smarter investor.
It can be difficult (read: nearly impossible) to know exactly when to invest money in the market to maximize your returns. But if you are a younger investor, yesterday was the best time to invest. And the second best time is now.
Because the key to growing your investments over your lifetime is compound interest. And the best way to maximize compound interest is to let it work for as long as possible.
“The greatest money-making asset anyone can have is time,” Ed Slott, publisher of IRAHelp.com, told CNBC Make It.
Case in point: The graph above shows the investment results of three people who initially invest $1,000 and then invest $200 per month. From the time they start investing until they retire at age 67, everyone earns an annual return of 8% per year.
The only difference: one starts investing at 22, another at 27 and the third at 32.
The investor who started early wins by a landslide and not because he invested much more.
After 45 years in the market, the investor who started at age 22 has put $109,000 into the market – just $24,000 more than the investor who started 10 years later. But at nearly $1.1 million, her total is more than double that of her counterpart who started later.
The graphic above shows 12 asset classes over the 20 years up to August 2023. On the x-axis is the standard deviation, a measure of volatility that essentially indicates how much the price of an asset fluctuates. The Y-axis shows the annual return over 20 years.
You may find that an investor favorite looks pretty good here. U.S. stocks of large companies (comprised of popular indexes such as the S&P 500) produced the highest returns of any asset class, although some – including all other stock categories – experienced higher volatility.
It’s a good thing that these stocks make up the core component of many investors’ portfolios.
Still, it would be wise to diversify, say financial experts. On the one hand, adding additional assets can help increase returns. Although U.S. stocks have performed well recently, past performance is no guarantee of future results.
“We’ve seen international stocks underperform for almost a decade, but there’s also something called reversion to the mean,” Sam Stovall, chief investment strategist at CFRA, told Make It. “At some point they will come back to the foreground. And like Wayne Gretzky used to do: skate to where the puck will be, not where it is.”
The shares of small and medium-sized companies will also have good opportunities at some point, say experts.
Additionally, owning a diversified mix of assets can help your business run more smoothly over time. Even though large company stocks have been less volatile than other types of stocks over 20 years, S&P 500 investors still saw losses of 56.8% during the 2007-2009 bear market, 33.9% in 2020, and 33.9% in 2022 of 25.4%.
By holding investments that perform differently based on different market forces, you effectively ensure that something in your portfolio will always work, even if your core holdings falter.
It can be easy to get caught up in the daily drama of the economy and the stock market. Will the Fed get it right? Will everything collapse?
When the market is hectic, think back to 1987 for a moment.
For those readers who weren’t following market news at the time, you just know it was bad. On October 19 of that year, the Dow Jones Industrial Average fell 22.6% – the largest single-day decline in that index’s history. The day became known as Black Monday.
The headlines at the time were frightening. Crash! Panic! Chaos on Wall Street! Overall, the broad U.S. stock market lost 33.5% between August 25 and December 4, 1987.
The headlines are getting scary again. And your portfolio will look just as ugly as investors’ portfolios did in 1987. In that case, go back to the chart above or type “S&P 500” into Google and click “Max.”
The historic upward trend of the stock market reduces the catastrophe of that time to a small speck on your screen. Ultimately, all downturns have become outliers.
Ultimately, as long as the market continues to behave the way it always has, whatever your portfolio does today, tomorrow, or next year won’t matter much over the course of your decade-long investing career.
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