The advantages of time and compounding
The most important investment principle we all need to understand is the remarkable power of time and compounding.
When you invest money it begins earning a return. And when these returns are reinvested the original investment begins to compound – to earn a return on its return. In its early stages, because the amounts are often small, this simple routine can appear of little significance. Over the long-term however, because the returns are earning returns year after year your investment grows exponentially. For example, an investment that returns 12% compound per annum will roughly double in value every 6 years.
The importance of a savings plan
The first and most important principle is to invest in yourself, by putting some money aside. The simplest way for most investors to achieve a compounding rate of return is to set up a savings plan whether through superannuation or directly. Using a savings plan you can put aside a regular sum of your earned income each month and invest it where it can earn returns that can be reinvested. Over time, the magic of time and compounding results in a wealth nest egg that is far greater than could be achieved by savings in a bank account alone.
The benefits of diversification
Spreading your savings between different investments and managers minimizes risk. All investors should consider diversification carefully is diversification. Most investments follow a cyclical pattern, with returns fluctuating over the course of these cycles. For example, there may be times when shares are performing well, but the property market is flat or in decline.
An investment strategy that relies only on property may, in these circumstances, result in inadequate returns. However, the addition of shares results in an overall portfolio that captures both positive share market performance as well as profiting from those times when it is the property market that is performing strongly and not the share market. In other words diversification acts to increase the reliability and consistency of investment returns by the steady accumulation of investments in different investment classes.
The benefits of a managed fund
For most investors the best way to achieve their investment goals and to take advantage of compounding returns and diversification is to have a savings plan via a platform and through diversified managed funds. Each dollar saved can be spread across a wide range of investments reducing the risk of relying on any one asset. In addition, most managed funds are structured so that investment returns can be reinvested and compounded.
The benefits of a financial adviser
For both men and women alike there are benefits of employing a financial planner. The right planner can assist you in the process of becoming financially literate as well as helping you to correct your own biases and weaknesses.
In summary
The earlier you start saving and the more you understand your individual strengths and weaknesses as an investor, the more likely it is you will be able to meet the financial requirements of any life stage. So why not invest in your financial future today - Call a financial adviser today, the sooner the better.
For further information, contact [Adviser] from RetireInvest [office].
This editorial does not consider your personal circumstances and is general advice only. You should not act on any recommendation without considering your personal needs, circumstances and objectives. RetireInvest recommends you obtain professional financial advice specific to your circumstances.
*[Adviser] is an Authorised Representative of RetireInvest Pty Limited (ABN 23 001 774 125), Australian Financial Services Licence 238429.