There’s one cost of investing that many aren’t aware of. It’s not a cost you can read in your financial statement or deduct from your taxes. This cost is simultaneously abstract yet real, and you may never even notice it, though its effects on your long-term financial goals can be severe.
The cost I’m talking about is the cost of waiting to invest.
How can that ‘cost’ you something?
In the form of forever lost potential returns.
Many Americans are hesitant to begin investing. We always seem to be in a time of crisis, and the headlines are full of doom and gloom. The question on every talking head’s lips is, “Will the economy crash next year?” “Will we head into a recession?”
Basically, we get bombarded with plenty of reasons NOT to invest on a daily basis.
Let’s just look at what’s happening today that may prevent people from investing: the Russia-Ukraine war is dragging on, the crisis in Israel and Palestine threatens to drag in surrounding countries, we’re recently out of a pandemic, and inflation is finally coming back under control after pre-Covid highs.
And how did things look twenty years ago? 9/11 was not just a memory but an open wound. We were in the opening salvo of the nearly decade-long occupations of Iraq and Afghanistan, terrorist strikes were striking fear around the world, the dot-com bubble had burst only three years earlier (the Nasdaq wouldn’t recover for fifteen years!), the Enron scandal had eroded investor trust, and, of course, let’s not forget the SARS outbreak that disrupted global travel and commerce.
Things never really change, do they?
However, history has shown us that even during volatile periods, opportunities for growth remain. Consider this: would you have taken the leap and invested during such uncertain times?
It would have been a mistake not to.
As of this writing, the Nasdaq stands at $12,983.81. Rewind to March 6th, 2000, and it was at $5,048 — equivalent to about $9,022 when adjusted for today’s inflation. This translates to a 44% return on investment – after accounting for inflation but before considering dividends and interest.
However, measuring your financial success isn’t the same as tracking the Nasdaq’s performance over two decades. For a broader understanding, let’s imagine a comprehensive portfolio and evaluate its decade-by-decade progress.
The Power of Starting Early (or the Dangers of Starting Late)
In our hypothetical scenario, we have a professional who begins their investment journey at the age of 30. We’ll use an annualized 10% rate of return similar to what the S&P 500 has provided over the years, combined with regular salary increases as our professional works their way up the career ladder. This investor follows a strict 50/30/20 budget, meaning 20% of their budget goes to savings – or, in our case, investing.
We also assume that our hypothetical investor doesn’t make any common mistakes, like panic selling or FOMO buying, and remains invested throughout.
Scenario 1: Starting at Age 30
The Investment Journey
- Ages 30-39: Annual Salary of $100,000 and an Annual Investment of $20,000.
- Ages 40-49: Annual Salary of $200,000 and an Annual Investment of $40,000.
- Ages 50-59: Annual Salary of $400,000 and an Annual Investment of $80,000.
- Ages 60-67: Annual Salary of $600,000 and an Annual Investment of $120,000.
Portfolio Value at Age 67
- Approximately $12.25 million
Now, this is what doing the right thing looks like – $12.25 million is nothing to scoff at, and using a strict 4% rule would garner about a $490,000 yearly salary, which would last 25 years until the ripe old age of 92.
Scenario 2: Starting at Age 40
The Investment Journey
- Ages 40-49: Annual Salary of $200,000 and an Annual Investment of $40,000.
- Ages 50-59: Annual Salary of $400,000 and an Annual Investment of $80,000.
- Ages 60-67: Annual Salary of $600,000 and an Annual Investment of $120,000.
Portfolio Value at Age 67
- Approximately $7.64 million
Lost Potential by Waiting 10 Years: Approximately $4.61 million
Granted, going into retirement with $7.64 million isn’t half bad. You can expect a $305,000 salary using a strict 4% rule for 25 years. But still, you would have had nearly five million more dollars had you just started investing ten years earlier! That could have gone to a better lifestyle, charity, an inheritance, or a combination of all three.
Scenario 3: Starting at Age 50
The Investment Journey
- Ages 50-59: Annual Salary of $400,000 and an Annual Investment of $80,000.
- Ages 60-67: Annual Salary of $600,000 and an Annual Investment of $120,000.
Portfolio Value at Age 67
- Approximately $4.11 million
Lost Potential by Waiting 10 Years: Approximately $8.14 million
In this scenario, your annual salary is $164,000. And depending on your lifestyle, maybe that’s plenty. But this is all before factoring in taxes, inflation, health care, and emergencies that could put a substantial dent into your nest egg. And even though $4.11 million seems like a healthy chunk of change, you may be risking your golden years.
Conclusion: The True Cost of Waiting
The scenarios we’ve explored reveal a startling reality: waiting to invest can cost millions. It’s not about market timing or picking the next tech unicorn. Instead, it’s the simple, consistent act of investing using the time-honored methods of dollar-cost averaging and regular portfolio rebalancing, and time – lots of time.
So, the next time you’re tempted to delay your investment plans, remember that the real cost isn’t in the risks of the market. It’s in the missed opportunities of the future. Choose wisely, start early, and let time work its magic. After all, it’s the most valuable asset we all possess.
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