Is There an Optimal Time to Invest? The Magic of Compounding

Is There an Optimal Time to Invest? The Magic of Compounding

Hello, this is Bitpunk. Today I'd like to talk about when to invest. Many people wonder when the optimal time really is. Right after the 2009 financial crisis? Or when the economy has settled into a fairly stable period? Well, who knows. One thing is clear: the market can change at any time, and investors have to respond accordingly. So does that mean there's no such thing as an optimal time to invest?

There is. It's right now. Provided you build up cumulative returns through smart investing, compounding can bring you enormous investment returns. Compounding can be described as reinvesting the returns on your assets to generate even more returns. This requires reinvesting your returns, and time. Through compounding, we can grow our initial investment exponentially. And that is why you should start investing as early as possible, and why now is the optimal time to invest.

One way to see the effect of compounding is to compare how long it takes to reach the same goal. Let's say there's a 25-year-old investor who wants to save $1 million by age 60. Assuming a steady 5% rate of return, he would need to invest $880.21 every month. But if a 35-year-old investor wanted to save $1 million by age 60, he would need to invest $1,679.23 every month. And at age 45, he would need to invest $3,741.27 every month. That's close to 4 times the amount needed at age 25.

Let's take a look at a few examples.

The Magic of Compounding, Example 1. Apple Stock

According to Morningstar's Advisor Workstation tool, a $10,000 investment in Apple (AAPL) stock made on December 31, 1980 would have grown to $2,709,248 based on the closing price on February 28, 2017. That's an annual return of 16.75%, assuming all of the stock's dividends were reinvested.

Apple only started paying dividends in 2012. Even so, if the dividends had not been reinvested, the final balance of this investment would have been $2,247,949. In other words, 83% of the amount you would have had by reinvesting.

The Magic of Compounding, Example 2. Vanguard 500 Index

Another great example of compounding is the Vanguard 500 Index Fund (VFINX) over a 20-year period starting in 1997 and ending on February 28, 2017. If you had initially invested $10,000 in the fund, it would have become $42,650 by the end of the 20-year period. This assumes that all fund distributions, whether dividends, interest or capital gains, were reinvested in the fund. Without reinvesting the dividends, the initial $10,000 investment would have stayed at $29,548, 69% of the reinvested amount.

Hmm, well. You might feel these examples are a bit far-fetched. But they are actually possible. Reinvesting all of your investment comes with that much more risk, but on the other hand, it's a way to grow your capital exponentially.

https://www.investopedia.com/university/beginner/beginner2.asp