I have just read a great post over at Plonkee. Plonkee talks about the need to effectively put your investment strategy on “auto-pilot” – with money being dripped into stakeholder pensions and Stocks and Shares ISA’s on a regular basis.
They key with any long-term investment strategy is to start as soon as possible – tomorrow is too late!
This reminded me of an article I wrote on the Rule of 72 and the Time Value of Money. The rule of 72 simply states that whatever rate of interest your money is enjoying, divide that rate into the number 72 and that is the number of years it will take your money to double in value.
For example, at 6% per annum, your money invested today will double in value after (the maths bit! – 72/6) 12 years.
So the sooner you start investing the more of these “12 year bits” you can accumulate in your lifetime.
The other benefit of starting as soon as possible is the benefit of “compound interest” – this effectively is where “money makes money”. If I invest £100 today, at a rate of interest of 5% I will have £105 at the end of the current tax year – in year 2 my amount invested is now £105 – I will earn 5% on this total amount – so in effect my £5 interest received in year 1 is now earning interest in its own right – “money making money”.
Present day investment environment
Most of you will be aware of the recent falls in world stock markets – it would be strange if you hadn’t heard about them!
Well it’s not all bad news – the only people who lose money in a falling stockmarket are those who need or have to cash in their investments. Everyone else has simply made what is known as a “paper loss” – in reality you haven’t lost anything – it’s just on paper – the only time you have made a real loss is when you cash it in.
Why is this of interest to the shrewd investor?
The shrewd investor will be the one who has continued to invest over the last year or so – on a regular basis to benefit from “pound cost averaging” – as they have been able to buy more and more shares at a lower price.
Any investment in the stock market should be viewed as a long-term strategy and I personal am looking at a minimum 10 year timeframe for each investment I make – I only invest the money if I am willing to hold that investment for 10 years.