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Most people don’t think about investing until retirement is already on the horizon. By that time, many of the opportunities to build a successful financial portfolio have already passed. This article will discuss three main reasons investing early is crucial to reaching financial goals.
Compound interest can be tricky in that it heavily penalizes individuals who do not understand how it works. While most college graduates look at buying new cars, they don’t understand that the interest they pay will compound over the life of the loan. On the other hand, a deposit into a mutual fund, Roth IRA, or IRA will grow interest, and interest on the interest. Unfortunately, compound interest needs time to work. Many don’t realize how compound interest can work in their favor soon enough to maximize its potential. Taking an active role in understanding compound interest early on can make a huge difference overall.
It is generally common knowledge that a well rounded financial portfolio is diversified.
When investors diversify early, they benefit from more opportunities to sculpt investments. Early on, an investor has more opportunity to balance risk and reward. Additionally, a diversified portfolio is more secure over time. With many types of investments, if one fails, others will likely still grow.
Bull and Bear Markets
Historically, the economy regularly shifts from a Bull to Bear Market. Whether new investors find themselves in an economy on the rise or fall, investing early can help safeguard against times with a declining economy. Indexes may go up or down every year, but the S&P 500, over the rolling 10 year periods, is only positive. An investment with more time to grow will be more valuable through time.
Overall, when it comes to investments, earlier the better. That’s not to say it’s ever too late to start. The most important idea to take away is, start investing today. While some investments will be better than others, time is a major factor in the success of a financial portfolio.