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3 Consequences of Delay in Investing

26 Aug 2019

Of course, there are consequences to delaying investments. It is often said that the best time to invest was yesterday but if you didn’t start yesterday, today is a good day. It is often seen that investments decisions are not planned while keeping in mind one’s financial goals may that be short term or long-term goals. Often, people decide on investment instruments without understanding how these instruments align with their personal financial goals.

Common consequences of delay in investing can be said to be:

1. Lower returns

Investments grow over time. When one starts investing in an appropriate instrument early, one gets a considerable head start over others in similar situations who choose to save money in saving bank accounts and FDs etc. Someone who starts investing a fixed amount every month at 24 years of age will have a larger sum of investment capital than someone who starts investing the same amount at 40 years of age and they both invest until they are 60-year-old.

2. Low Compounding Benefits

Compound interest was referred by Einstein as the eighth wonder of the world and rightly so. Just like investing early gives a head start, it also brings with itself the wonderous compounding effect.

If someone invests Rs. 10,000 every year and his investments grow at CAGR of 20% for 10 years, his investments will hold value of Rs. 61917. However, if someone starts investing Rs. 10,000 every year after 5 years of the first person’s investments, for 5 years, his returns will only amount to Rs 24883. This is the magic of compounding!

3. Risk appetite and its implications

A person’s risk appetite can be understood as the level of risk a person is willing to take to meet the desired objective. At a young age, an investor has higher risk appetite since he has no or very little financial responsibilities that would require attention. As the person matures and progresses in his / her life cycle, marriage, children and their education all become responsibilities that need to be fulfilled and thus the risk appetite decreases. This is one of the reasons why investing early is beneficial.

When we talk about investments in the stock market, they can either be based on a theme or an investment strategy.

Themes are comparatively short lived that affect the stock market. When investing keeping in mind a particular theme like Lok Sabha Elections or certain policies, governmental push towards certain sectors like the electric vehicles industry etc. the time at which the investor enters and exits the positions is of prime importance (point A).  There is a spike that is observed (from point A to B) and after some time, the returns mellow down (from point B to C). However, the returns are still above the initial level and this positive change in return is called a boost (the difference between point A and C).

When investments are based on an investment strategy, the entry position holds importance but is not as important as in theme-based investments. Strategies that are formed on the principles by Peter Lynch, Benjamin Graham etc. based on famous books, formulae and screening criteria are long term investments which can be considered.

Key Takeaway

There are numerous benefits of investing early. However, to think now is too late, is a mistake. Aligning investments with your financial goals is an important task and should be worked upon on priority. It is important to understand that even though saving is a good habit, but one cannot expect the return from a savings bank account beat the widespread inflation. Investing in instruments suited to individual with respective risk profile and financial goals has greater chance of beating inflation.

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