Invest early to meet long-term goals

One of the benefits of investing over the long term is the power of compounding. No wonder, Albert Einstein famously stated: “Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.” Simply put, compounding helps you make money on the money that you have already earned.

However, many investors fail to benefit from this powerful concept as they begin investing without a clear time horizon, that is, without having a clear idea about how long they can remain invested. This often results in the edginess in their behaviour every time the market turns volatile and at times prompting them to make ad hoc decisions. In the process, they end up compromising on their long-term goals.

Besides, long-term goals like children’s education and marriage as well as planning for retirement generally require a large corpus. But investors keep postponing the start of their investment process, because they either get overwhelmed by the amount required for each of these goals or because of the feeling that they will not be able to achieve their goals with smaller sums of money that they can afford to invest. Then, there are investors who mainly rely upon traditional options like fixed deposits, bonds and insurance products such as endowment plans for achieving these goals thus putting themselves at a great disadvantage. Since these options provide low returns, keeping pace with inflation is always a struggle for them.

In reality, investing early is a very simple yet powerful method to achieve long-term goals. The earlier you start, the longer your investments have the time to grow. In other words, investing early ensures that there are no shortfalls in the targeted amounts. However, it is important that you invest in those options that have the potential to give you positive real rate of return, that is, returns minus inflation. This factor is crucial considering the ever-escalating costs of long-term requirements.

Therefore, you must consider the long-term impact of inflation on your investments. Remember, the level of inflation risk depends on the length of time you have to achieve your investment objectives. For your short-term investments, volatility is bigger risk than inflation. That’s why, a short-term investment strategy should focus on stable principal value through a portfolio consisting of interest-bearing securities and long-term strategy should focus on staying ahead of inflation through an asset class like equity.

You must also focus on the average rate of return rather than worrying too much about the market volatility. It is a proven fact that over the longer term, volatility tends to work itself out due to offsetting of good years against bad years. Therefore, the key considerations for your investment strategy should be how much you wish to invest and how long until the money is needed.

A mechanism like a Systematic Investment Plan (SIP), for investing in mutual funds, can be a great tool to benefit from averaging as well as power of compounding. By doing so, you benefit from the fact that over a period of time stock markets generally go up. Simply put, your average cost price tends to fall below the average Net Asset Value. This “averaging” ensures that you buy at different levels, without having to worry about the market levels. Also, don’t forget that risk is an inherent part of investing and that there is a direct co-relation between risk and return.