Studies of Life

Learning by doing.

Time, the Essence of Investing

12 August 2014 by Jim

A graph illustrating compound growth at 10% per year.

Your investment returns are not the only thing that matters. Earning 30% in one year and then nothing for the next two is worse than earning 10% three years in a row. Many people do not understand how important consistency is to compound your investment returns.

The graph above shows Tom and Mary, both of whom invest 2000€ per year in an investment that returns 10% each year. The only difference is that Mary starts at age 25 while Tom waits until he is 30. That slight difference of 5 years may initially seem small, but at age 50 Tom has just 120’000 euros, while Mary enjoys almost double that at 208’000 euros. The nature of compounding is that it takes a long time to see its aggregate effect on growth. The later years in your investment career will become ever more significant for your wealth. Once you start investing, keep on doing it, and have a plan as to how much you want to invest every month or every year.

Consistency, lots of small steps, will beat isolated large efforts every time.

Since I’m currently studying at university, besides working, I have applied the exact same principle to my studying habits as well. I often do not ‘find the time’ to study, which is a euphemism to say that lots of other things are more interesting and more rewarding in the short term than studying. So I just told myself to regularly, i.e. each day, study for a few hours. If I study 2 hours every day, I get 14 hours done per week. If I didn’t force myself to do the 2 hours every day, I would have to come up with a way to do 14 hours of work on the two or three days that I ‘feel like’ studying. What sounds more manageable? Doing 2 hours of studying per day, or 7 hours of studying on two days every week?

The same thing holds true for investing: either you invest small amounts every month, as much as you can handle or want to, or you don’t invest for 10 years and then, at the end of that period, hope that somehow a large amount of cash suddenly materialises in your bank account so you can start investing with a big pile of cash.

Slow and steady is the way to go!

If you need inspiration on how to start investing, check out my post on Bondora / isePankur for steady 20% per year returns or the post on Piotroski’s stock picking method for potentially larger returns but also considerably more volatility and risk.

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