Here are the three main factors about that will help you determine how well your investments are performing.
1. Your Timeline
ESI Money consumed the numbers and found that time is the most significant factor in how well your investments perform. “The longer you wait to save and invest, the more you’re costing yourself,” he said. In other words, it’s all about maximising the benefit of compound interest.
The chart below shows the difference in savings for a 25-year-old who spends away $1,000 until age 28 and ceases to continue, and a 15-year-old who puts $1,000 of their summer job income into a Roth IRA — a retirement account where your savings grow tax-free — for four years and then stops. The early saver will have nearly doubled as much money saved by age 65 as the late saver, with no extra effort, assuming there is a 7% annual rate of return. They’d still come up short even if the late saver continued setting aside that same amount until age 30.
Saving is one best way to gain more income, but the idea remains: The more time your money has to increase or grow, the more you’ll end up with.
2. How much you invest
The good news is that you don’t have to invest a large amount of money to earn a lot over time. How much money you earn will be based partially on how much you invest. You can easily start by contributing 15%, 10%, or even 5% of your pre-tax income to a retirement account, like a 401(k) or IRA. If you’re worried about investing too much money for fear of losing it, don’t be. Stock market investors had a 99% chance of maintaining at least their initial investment — the same as a traditional savings account, according to a recent NerdWallet analysis of 40-years of historical returns.
3. The Return Rate
Traditional savers had less than a 3% chance of tripling their capital while the NerdWallet analysis found that investors had a 95% chance of gaining profit nearly three times their initial investment. The rate at which your money grows is completely out of your control, and it remains the same. Ultimately, you’re doing well if your investment improves faster than inflation, which won’t happen if your money is shored up in a bank account with super low-interest rates. To lessen risk, expanding your funds across distinct types of companies, industries and countries are key.
Investing in a low-cost index fund that does the expansion for you is a stepping stone — like the Vanguard Total Stock Market Index Fund. Another increasingly popular tool for first-time investors are robo-advisors, which use an algorithm to create and manage your portfolio for a small annual fee. Or, you can follow Buffett’s advice to stick with a simple S&P 500 index fund, which invests in the 500 largest US companies. These are commonly called “set it and forget it” investments that grow over time, regardless of short-term performance. Just make sure you’re not spending annual fees higher than 0.5% or it’ll eat into your returns.
ESI Money sums up the winning formula best: “Save early, save often, and save more as time goes by.”