Anyone who had read articles or books on investments or had attended talks on investments would definitely come across the diagram, Figure 1. In a very basic form, it is just a line graph that curves exponentially upwards. The most simple and widely explanation is the longer we hold our investments, the higher will be the returns given the compounding nature of investments in general.
This is generally true, and I totally agree with it. Of course, it does not mean that the rate of return is always 10%. Sometimes it can be more and sometimes it is less. But, by and large, a reasonably decent investment should be able to compound and accumulate value over time. In fact, a good example can be as simple as leaving our money in the CPF. If we do not touch it for many years, the compound returns after some years can be quite substantial. In fact, based on the rule of 72, if we leave our money in the special account (SA), it should double every 18 years without further top-ups. (So, perhaps if you do not have any further use of the OA account, perhaps it may be a wise decision to transfer your funds to the SA account). Compounding also applies to endowment policy in insurance. The terminal value is always much higher because insurers are willing to pay out much more if we can hold the policy to maturity. In fact, as a trainer, I practice and preach it. But then, is there anything more that we can learn just from this simple graph? There are, for sure. For someone who had suffered a setback in investing, I certainly think there are.
Given this curve, draw another curve with the same curvature as the original one, but with the starting point at 10 years later. What do you get? You get two curves as shown in the Figure 2. What can you deduce from it? If you have started on the same investment giving exactly the same return as the original one, but only 10 years later, the two sets of results are substancially different. By the end of 40 years from the 1st curve or the end of 30 years from the 2nd curve, there is a stark difference between the two. This means that if a person were to start an investment at the age of 20 with an initial outlay of $1000 that yields 10% per annum would have turn it to $45,259 by the time he turns 60. If he were to delay it till 30 years old on the same investment, his returns is only $17,449, a return of less than 40% of $45,259. It is the end point or the end–results that is important, not the starting point. Perhaps, many people may not see it. Their focus is the beginning, which did not make a big difference ($2,594 versus 0). Perhaps, there are also others who think that they can delay their learning journey just to save a couple of dollars or so. Perhaps, they believe that reading books and doing researches are all that they can to do equally well but all these translate to time lost or procrastination. It is a time delay, and the cost of it is many times more. Coming from a point, where I had suffered initial setbacks, the learning curve was very steeper. To catch up financially in life, I have to shorten the compounding period and to increase the rate of return. It is definitely not a desirable path that I would take if I want to start all over again.
Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.