It's important to invest early but the market might have the last laugh
I think it's a very commonly established fact that investing early does wonders for your portfolio. There are no doubts about that.
The sooner you start investing, the more time you allow your investments to compound. Compounding effects are probably the best thing that can do to your portfolio.
Just look at the chart below.
A dollar invested on 31st January 1974 would turn into $154 dollars by 31st December 2019. That's despite all the market crashes which happened along the way, including major crashes which happened during 2000 and 2009.
Similarly, a dollar invested in February 2009 will only turn into $4.51 by 31st December 2019. This should already provide a very compelling reason why investing early makes absolutely sense and everyone should invest as early as possible as the market (or at least the US market) has proven that it is always going up in the long term trend.
That's cool, you might be thinking. But why did I say that the market will still have the last laugh?
To put things into context, I'm referring to the scenario where we are investing to grow our wealth for retirement purposes.
You see, most of us don't just invest a big sum of money at the beginning of our career and just wait for 20-30 years to pass for the big sum of money to compound into our investment nest egg and retire. In reality, it doesn't work this way.
What usually happens is that we will invest continuously in the market throughout our career. Most of us will not just have a big sum of money to invest right at the beginning. Our portfolio is usually one that results from constant accumulation throughout the years.
This is the absolute reason why the market conditions nearing your retirement age will be a very important factor. In fact, market conditions early on in your investing journey does not matter as much.
This is because of what we called Sequence of Returns Risk.
How the market performs at different points of our investing journey has huge impacts due to the fact that we constantly accumulate or contribute to our portfolios throughout the years.
As highlighted in the article above, here are the scenarios.
Initial sum: $100,000
Accumulation method: Contributes $10,000 annually at the beginning of each year.
You may notice that the returns in both scenarios are identical. The only difference is that the returns in scenario B happen in reverse order.
At the end of five years, the portfolio under scenario A would be more than $159,000 with a CAGR of 7.64% while the portfolio under scenario B would be more than $182,000 with a CAGR of 10.65%. This is how the sequence order of returns could affect your portfolio.
While it's important to invest early, you cannot control how the market behaves. And the behaviour of the market (like what you saw above) will heavily affect your route to retirement and there is very little you could do about it.
On the bright side, this is also the reason why you shouldn't feel despaired with the current market conditions. If you are still 20-30 years away from retirement, the current horrendous market conditions might actually be preparing you for a very well retirement years down the road (like what you are seeing in scenario B). On the flip side, the current horrendous market conditions can also negatively impact your retirement if you are planning to retire in these recent few years (like what you are seeing in scenario A).
Hence, do what we may but the market might very likely still have the last laugh.
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