Why The Best Time To Start Investing is NOW
A common quote around finance circles, particularly within the FIRE community, is that the best time to start investing is yesterday and the second-best time to start investing is now. A lot of the time though, people believe they do not know enough yet, they need to keep researching before they do finally take the plunge.
While I do agree that it is necessary to understand exactly how your investments work, how the returns are generated and what you are actually investing in, I also believe there is a significant number of people who fall victim to the “analysis-paralysis” trap.
What is “analysis paralysis”?
Analysis paralysis describes the process when overthinking a situation can cause decision making to become “paralysed”, meaning that no decision is eventually made. Typically, with finance, it is the fear of either making an error (choosing a poor investment) or missing out on a superior solution (not choosing a better investment).
With investments, because there is a seemingly unlimited number of ways to invest your money, so you end up looking at each and every option to ensure you pick the best one. This makes sense doesn’t it though? I mean you do not want to make a mistake and want to maximise your return so it is understandable that you should take time to choose the right investment.
I do agree with the above sentiment, but I also believe that sometimes people definitely over-complicate matters and make it too hard on themselves. For instance, if you were looking at investing in stocks, you could look at charts and data for months and months on individual stocks and end up waiting until the absolutely perfect stock came up before waiting to invest. When right at the start you could have chosen an index fund and most likely end up achieving the same return.
My Own Analysis Paralysis
When I first looked at investing in the US, I did end up in a bit of an analysis paralysis situation of my own. At the time there seemed to be opportunities in just about every state, and then in each state there were multiple cities where opportunities arose. There were literally hundreds of potential cities to be invested in, each with their own pros and cons, and that was even before looking at individual properties.
How did I overcome it? Well, it may not have been the best solution but it at least seemed to work for me. All I did was just make a decision, I forced myself to just choose a city, and in the end, I went with Fort Myers, Florida. It may not have been the best place to invest (or it could have been, I really don’t know, I am definitely not complaining anyway), but I knew it had good opportunities still available if I got the right property.
Once I forced myself to just make this decision, everything suddenly became a lot easier. Instead of looking at states and cities, I was able to just focus on suburbs and specific properties, and I was a lot closer to starting my investment journey in the US. I talk a lot more about my US investments in this POST.
Why Delaying Can Be Detrimental
I want to look at now how delaying, even in the effort to achieve a higher return, can still be detrimental overall. I have made a quick spreadsheet to compare two different scenarios.
- $5,000 monthly investment immediately returning 7.00% per annum.
- $5,000 monthly investment starting in 6 months returning 7.50% per annum.
I will start out by saying that even if you do research further, it is very difficult to beat an index fund. But for the sake of argument, let’s assume we are able to obtain a return 0.50% higher than our initial investment.
Results
After 6 months we have the following returns for each Scenario
- $30,618.49
- $30,000.00
Because we started investing in Scenario A immediately, we have already gained $618.49 in returns while Scenario B is still just our savings.
After 12 months
- $62,324.38
- $61,805.85
Even with a higher return for Scenario B, we still have an extra $518.52.
After 25 months
- $134,936.75
- $134,936.36
25 months is the breakeven point between the investments, over 18 months since we started investing with Scenario B and we have finally caught up to where we would have been if we had just started immediately.
Conclusion
Obviously, after the breakeven point of 25 months, Scenario B will continue to significantly outperform Scenario A. This makes sense because obtaining a 0.5% per annum additional in your investment is quite substantial.
But that also means that we have 18 months to continue researching, while we continue to invest in our “Lower returning investments” to fine tune our investments and obtain the optimum returns of Scenario B.
There is a very good chance that even after researching for months and months you would be unlikely to beat returns from Index Funds on a regular basis. Index funds are the simplest way to invest and often they turn out to be the best returning assets for you. It really is a win-win situation.
Disclaimer – small disclaimer, the above approach is not really applicable to property investment, obviously you cannot change your strategy as easily as shares as you are on your investment journey.
Summary
Investing always starts with a small step, the longer it is delayed the bigger the leap becomes and the harder it can be to make that first plunge into the stock market. If you start out early, investing $2,000 per month for example, the volatility will be relatively small, maybe up or down $20 per day. Amounts like this can be easily managed on a psychological level.
Imagine if you took a year or so to start investing in shares, and you finally got the courage and you put in your annual savings of $40,000. Now your first experience with shares is daily fluctuations around $500. For some people this may be fine and manageable, but a lot of people could potentially freak out.
It is near impossible to start out with the perfect investment plan, I don’t think one would really exist to be honest. Investing is all about continuous learning as you make your way along as you find out what is right for you because everyone has different requirements when it comes to investing. The earlier you start, the earlier you can start learning from your own experiences and growing as an investor and building that portfolio.