Ten years is a long time. But for those investing in equities, it is a time horizon that is suitable (ideally speaking) when they look to benefit from the high returns associated with the asset class.
What difference can 10 years make in investing?
This small analysis tries to highlight the benefits for the following types of investors:
– Those that start early in equity investing
– Those that can wait for long
In a way, both are two sides of the same coin. But the idea is to highlight what the potential benefits are of staying invested for long (either by starting early and/or by staying put).
Starting early pays
Suppose you start investing Rs 1 lakh per year for 10 years and then don’t invest anything for the next 20 years. That is, Rs 1 lakh each during years 1 to 10 and nothing from years 11 to 30.
What would be the value of your investment (Rs 10 lakh in total) at the end of 30th year?
Assuming a 10 per cent average annual return, the corpus would be Rs 1.17 crore at the end of 30th year.
Now compare this performance with your friend’s, who realizes the benefits of equity investing a little late. At the end of 10th year, she decides to begin investing Rs 1 lakh per year for the remaining 20 years, i.e., years 11 through 30.
What would be the value of his investment (Rs 20 lakh in total) at the end of 30th year, assuming the same returns as above?
The answer is Rs 63 lakh.
See the difference starting early can make?
You started early and invested just Rs 10 lakh. And you have Rs 1.17 Cr after 30 years. Your friend started 10 years late but kept investing for double your time, i.e. 20 years. Still, she only had Rs 63 lac. That is almost half of what you accumulated.
An interesting thing to note here (a common observation) is that the earlier you start, the longer the time you can remain invested.
Allowing time for compounding
Take for example your retirement. Assuming that you retire at 60, the earlier you start saving for it, the more the time you have available for your money to compound. So, if you start at 30, then you can save for 30 more years. But if you start at 40, then you only have 20 years to save.
Correlate this with the example above:
-If, at 30, you starting saving Rs 1 lakh a year for just the next 10 years for retirement, then at 60, you will have Rs 1.17 crore
-But if you start late, at 40, and save Rs 1 lakh a year for the next 20 years, then at 60, you will only have Rs 63 lakh
Now let’s see how it helps to stay invested for a little longer.
Let’s stick to the original example of investing Rs 1 lakh per year for 10 years and then doing nothing for the next 10 years. At the end of this 20th year, your savings would be Rs 45.5 lakh.
Now, what if you do not take out your money at the end of 20th year and instead wait for another 5 years, i.e. till 25th year?
Your savings would have grown to Rs 73.2 lakh (without any additional contribution).
And what if you stayed for 10 years extra? You would have Rs 1.17 crore.
The earlier you start, the longer you can stay. And the longer you stay invested, the more the time available for compounding your investments. And the results of compounding are phenomenal as you have seen above.
You might feel that all this is a theoretical exercise as you don’t get 10 per cent returns every year. However, such assumptions and projections serve the purpose of highlighting the importance of starting early.