Long term investing should always be a part of everyone’s financial planning strategy. This is mainly due to the effect of compound growth in the later years. Using time and compounding growth together are very powerful tools in wealth creation. This type of strategy is used for education and pension planning as well as long term savings to repay things such as mortgages.
In general you should always put away at least 10{c58138ea3e44d65a1a0a9fe41a480c4c95c47de5c3fc9f074d8f2ba940ff80e6} of your income into this type of structure. Ideally 20{c58138ea3e44d65a1a0a9fe41a480c4c95c47de5c3fc9f074d8f2ba940ff80e6} of income would be best in the early years. This income is invested on a monthly or quarterly basis. It can be paid upfront as a lump sum at the start of each year, but this removes the benefit of dollar cost averaging. Initially you take an aggressive view on the investment holdings even if the markets take a down turn this works fine as we use the advantage of dollar cost averaging.
An interesting metaphor to illustrate the effect of compound growth in later years and why it is so important to start early is the golfing example. If at the start of a game of golf you bet your partner 10c for the first hole and you agree to double the wager each hole, so that the 2nd hole is 20c, third is 40c, and so on. What do you think the wager would be at the 10th? $51.20, at the 15th $1638.40 at the 18th it rises to $13,107.20.
Compound growth is the main reason why we take risk
“Would you rather have $10,000 per day for 30 days or a penny that doubled in value every day for 30 days?”
The answer is to choose the doubling penny, because at the end of 30 days, you would have about $5 million versus the $300,000 if you chose $10,000 per day.
Compound interest is often ignored or classed as marketing hype used to sell investments, but in reality it is the most valuable investment tool there is. Perhaps people do not understand the fact that it requires a great deal of time and patience to actually benefit from using compounding. The fact is put away a small amount of your income every month into equities, and after 20 years you will have a sizeable return.
It is clear that turning a penny into £5 million over 30 days does take the idea into the fairy-tale realms but the principal stands. The best part about compound interest is that it applies to money, and it helps you to achieve your financial goals, such as retiring comfortably, or being financially independent. A school fees plan put in motion early enough can reduce the effect of school fees by as much as 60{c58138ea3e44d65a1a0a9fe41a480c4c95c47de5c3fc9f074d8f2ba940ff80e6}.
The Components of Compound Interest
A dollar invested at a 10{c58138ea3e44d65a1a0a9fe41a480c4c95c47de5c3fc9f074d8f2ba940ff80e6} return will be worth $1.10 in a year. Invest that $1.10 and get 10{c58138ea3e44d65a1a0a9fe41a480c4c95c47de5c3fc9f074d8f2ba940ff80e6} again, and you’ll end up with $1.21 two years from your original investment. The first year earned you only $0.10, but the second generated $0.11. This is compounding at its most basic level: gains begetting more gains. Increase the amounts and the time involved and the benefits of compounding become much more pronounced.
A simple way to know the time it takes for money to double is to use the rule of 72. For example, if you wanted to know how many years it would take for an investment earning 12{c58138ea3e44d65a1a0a9fe41a480c4c95c47de5c3fc9f074d8f2ba940ff80e6} to double, simply divide 72 by 12, and the answer would be approximately six years. The reverse is also true. If you wanted to know what interest rate you would have to earn to double your money in five years, then divide 72 by five, and the answer is about 15{c58138ea3e44d65a1a0a9fe41a480c4c95c47de5c3fc9f074d8f2ba940ff80e6}.
The cost of delay: The sooner you start the better
DOLLAR COST AVERAGING!
Investors do not always understand the basic principles behind the planned management strategy of a “Regular Investment Plan”.
For many investors, “Buy low, Sell high” is much easier said than done. Fortunately there is a method of investment called Dollar Cost Averaging that allows investors to avoid the problems of worrying about market timing.
Dollar cost averaging is really quite easy. Rather than trying to time the markets highs and lows, you simply invest the same amount of money every month over a long period of time in Mutual Funds or Unit Trusts.
Because you are investing the same monthly amount.
Should the market drop, your next monthly investment will buy a larger number of shares.
Equally, if the market rises you will have increased in value, and buy less shares at the higher price.
“Is now a good time to start such a plan? Yes- as long as you have the correct strategy and machinery in place. Whether we are riding a Bull market, or languishing in a Bear market, there is still money to be made”.
This is a hypothetical situation and markets rarely behave in such a uniform way. However, this example shows clearly the advantage if investing regularly when markets are falling. It should be remembered that unitised Investment must be considered as long term investments.
The main point of this graph is to illustrate that we do not need to time our start with the markets as downward markets assist with the longer term strategy. Obviously the closer you get to maturity or retirement we adjust the risk profile of the savings to protect the value. As per the graph below, it’s all about building up more units (shares).
Best accounts for asset management
The aim is to provide you a tax efficient structure that will allow you to place all your financial assets under one roof, provide the highest levels of investor protection, asset protection and create the best structure in regard your current or future tax liabilities. It will also make it easier to monitor your assets on a regular basis; and if required use them as collateral for borrowing.