The benefits of starting your savings early

There are advantages beyond simply having more money sooner.

Jess Morgan 25 January, 2016 | 6:00PM Christine Benz

 

 

Note: This video is part of Morningstar's January 2016 Five keys to retirement investing special report.

Starting early means . . . surviving bum markets

Christine Benz: Starting early with your savings and investing program can help mitigate the risk that you'll encounter a lousy market environment over your time horizon. Over very long periods of time the ups in the stock market tend to outnumber the downs. So, the longer you are invested, the more likely you are to have a positive or a good return with your stock market portfolio. Over time, though, stocks are more volatile than other asset classes, so you do need that longer time horizon to be able to withstand them and recover from them.

Starting early means . . . not having to invest as much

Investors often assume that if they are starting very small, they don't have enough assets to invest. But the fact is, even if you have a very small sum, that you are able to save and invest in the market, thanks to compounding, over your longer time horizon you maybe able to accumulate even more than the person who starts with a larger sum, but waits for a longer period of time to get started. So the overall message is, even if you're starting small, think about getting that money invested.

Starting early means . . . achieving other goals

The late-start investor may be scrambling just to make a retirement plan work. Retirement planning has to be the key and perhaps the only focus for the late-start investor. But people who get started earlier have a better shot at achieving shorter and intermediate-term goals along the way. So they may be able to use their investment money to help fund a down payment on a home, for example. They may be able to use their investment money to help fund higher education. So the late-start investor, unfortunately, necessarily, is often very single-minded in his or her investment goals. The earlier-start investor has more chances and can hit some financial milestones along the way.

Starting early means . . . a more conservative portfolio

A lot of Morningstar data point to the fact that investors are better able to stay the course with their portfolios if they have a mix of safer investments as well as more aggressively positioned investments. Late-start investors often have to focus on more aggressive investments. They might forsake the conservative investment types and the risk is that they will jettison their whole portfolio plan at an inopportune time. An investor who starts nice and early can start with a well-diversified portfolio and gradually step into more conservative positioning that makes the total portfolio easier to own and makes it more likely that that early start investor will have a successful outcome.

About Author

Jess Morgan

Jess Morgan  Jess Morgan is the associate editor of Morningstar Canada’s website. She began her career as a television producer and freelance writer, often making appearances on TV and radio as a commentator on politics and culture. She holds a BA in communications from the University of Winnipeg and a diploma in Creative Communications from Red River College.