For most investors, they face a quandary. When they are young, the benefits of compounding are at their greatest. However, it is also the time in life when most people have the least amount of capital to invest. Similarly, as investors get older the effect of compounding is reduced but they have a greater amount of capital through which to build their portfolio.
This could lead investors to believe that by the time they have enough cash and experience to invest a sizeable amount in shares and other assets, it is too late to generate a decent return. After all, most people retire in their 60s and then adopt a more risk averse which focuses on income rather than capital gains. Therefore, many investors may ask themselves at some point in their lives if it is too late to start investing.
The answer to that question is categorically ‘no’. It is never too late to start investing since shares can provide stunning growth in even a short period of time. For example, the S&P 500 has risen in value by 90% in the last five years. When dividends of around 2.5% per annum are added to this figure, it means that an investor could have more than doubled their money in a relatively short space of time. As such, even investors who have reached 60 should still be confident that they can generate a worthwhile return before they retire.
Furthermore, investing later in life is likely to bring greater success than in your younger years. As mentioned, older investors are more likely to have greater experience than their younger selves. This can help them to achieve a greater return since they may be better able to spot growth opportunities and may have more detailed knowledge of specific regions and/or sectors.
More experience could also reduce risk through the avoidance of losses. In other words, in their younger years investors may be required to make mistakes as they seek to learn and improve their investment skills. However, when more experienced they may be able to avoid value traps, have more patience when it comes to waiting for a sufficiently wide margin of safety and also place greater importance on diversification and risk management.
Of course, that’s not to say that in their younger years investors will fail to achieve those things. It is very possible for investors of all ages to generate high returns. However, it tends to be the case that the best investors are the ones who have made mistakes in different market conditions. Therefore, older investors may have an advantage over their younger selves in this regard.
So, while the older you are the less compounding will take place, it is still worth investing even if retirement is just around the corner. The availability of capital, both in cash and non-cash form, may be higher and provide a boost to your overall investment returns.
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