Whats your cost if delay investing

Some of us put off financial planning, postpone retirement savings or delay pay off escalating debts.  These eventually translate into a bigger financial loss. To eradicate this habit, learn how time determine the value of money.

• The power of compounding. When money works for us, it grows in value or compound, earning interest on interest and it is one of the greatest aspect of financial planning. 
• The cost of procrastination. If your goal is to raise RM100,000 by age 65,  compounding at an annual rate of 10%, your current annual saving (assuming you are 20 year old now), RM1,132. However if you only start your savings at age 50, your annual saving will be RM22,500.
• Inflation factor. The price of goods and services increases over a period of time. Thus a dollar tomorrow will not buy as much as today's dollar.
• Other lost opportunities. We can be adversely affected financially if we put off other important financial matters like life assurance, retirement plannning, estate planning or even basic financial planning.  Eg the insurance period of a 45 year old is much higher than than for a 20 year old for the same coverage.

Delaying manging our money may result in lesser in value compared to investing now.  

"Compounding" your gains

There's only one investment technique that's mathematically certain to build fortunes from small starting positions. It is a sure technique  thant anyone can do –  called  compounding.
You invest your money in something that pays you a return in the form of dividends, interest, or profits. Then you reinvest your dividend or interest income back into the investment.  Now your dividends are earning dividends and your interest is earning interest. You are "compounding" your gains by reinvesting your profits.  A snowball is the best analogy for compounding. When you first roll the ball in the snow, it gains mass slowly. But as the surface area increases, it picks up more snow. Suddenly the ball is so heavy you can't move it anymore.

Time is the most important ingredient in compounding. The more years you give it, the more your money mushrooms. Here's how it works… Let's say at age 40, you invest RM5,000 at 8% and reinvest the income. At age 65 you'll have RM34,000. If you'd made the same investment at age 20, you'd have RM160,000 by the time you turn 65.

To make the most of compounding, you should make regular payments. If you'd invested RM5,000 every year at 8%, starting at age 20 and reinvested the income, you'd have almost RM2 million by age 65.

Importance of Time in Investing

Most investors beat themselves. Too impatient to wait for returns to accrue, they fail (by a wide margin) to even match index or benchmark returns.  Charles Ellis' in his book, Winning the Loser's Game: Timeless Strategies for Successful Investing identifies time as "the single most important factor in any investment program.

If you're focused on the long term, time creates certainty. If you want to be more certain of your expected investment returns – if you want to compound your money at the highest possible rate with the lowest possible risk – mastering time is the key. You must learn to look past short-term noise. Long-term investors must learn to hold stocks for at least 10 years.

In fact, at 10 years, you're only just beginning to achieve certainty. According to Ellis, out of all possible returns for the S&P 500 in all the 10-year holding periods from 1900-2000, there's only one loss. The average annual gain is anywhere from 5% to 15%.

To really use time to create certainty, you need to go out even farther than 10 years. The range of returns for all the 20-year holding periods during the last century contains no losses, only positive returns. The average annual returns range anywhere from 1% to about 12%.  A one-year holding period is purely a gamble. At 10 years, you're an honest-to-goodness investor. At 20 years, you're demonstrating mastery of time. And mastering time is how you beat the market.

If you really want to be certain you're not going to lose money, you shouldn't invest with money you're going to need in less than 10 years. If you can't wait for your returns to arrive, you can't be certain you'll earn them.

http://www.dailywealth.com

How Much Risk Should You Take?

Now, actually deciding on how much risk you need to take is very difficult. You need to be able to keep your asset allocation in both good years and bad years, so in on one side you have to measure how much risk you can take – risk tolerance. On the other side, there is a certain amount of risk you need to take in order to outrun inflation and reach your investment goals. Finally, you have to take into account that risk also decreases over time. 

You can see here why stocks are considered a good long-term investment, but a horrible short-term investment. This chart shows that for any 25-year period within 1950-2005, the very worst you would have done was +7.9% annually while the best was +17.2%. However, for a 1-year time horizon, the possible returns vary wildly.

Risk & Time Horizon

The time horizon over which you will build up and hold your investment, a period likely to be determined by your age, play a significant part in how you allocate your  portfolio.  If you are in your 20s and 30s investing for retirement or put your child through higher  education, you should preferably invest in Equity Fund as your holding period will be 20 years or more. If you are nearing retirement, you should invest substantially in Bond Fund which gives a predictable return.