Time favors the young investor

I just graduated from college and have a new job. My parents say I should start investing, but I have other expenses, plus the stock market seems pretty shaky. Should I start saving now or wait until later?

If you are a younger person relatively new to the idea of investing, the stock market's severe downturn that began October 2007 may have provided a dose of harsh reality. Like other investors, you might feel cautious about putting money to work in the stock market. Though this is a natural response, the more appropriate course for most young adults who are starting to earn income is to participate in the markets as early as you can.

Though it is important to maintain proper expectations about the risk of market fluctuations in the short run, the most important fact for any young investor to keep in mind is that time is on your side.

Those who get a jump-start on regular investing at a young age have the potential to profit in the years to come. There are notable advantages to investing early.

It is no secret that the stock market is a very unpredictable place to invest. Fast-developing events can quickly change the environment, and markets have fluctuated wildly in both directions over short periods of time. But as you stay invested, you can potentially ride out fluctuations in the market.

Consider the return history of the Standard & Poor's 500 stock index. The worst-performing 12-month period going back to 1970 saw the S&P 500 Index return -43.32 percent. By contrast, the best 12-month period for the index resulted in a return of 59.26 percent. That broad range of returns demonstrates just how unpredictable the market can be in the short term.

Expand the investment time horizon out to 10 years, and the best and worst average annual returns range from 19.44 to -3.43 percent.

The range of returns narrows even more significantly through a 20-year holding period. Since 1970, the average annual return through each 20-year period has ranged from a low of 7.10 percent to a high of 18.26 percent.

The point is simple: The longer you keep your money, the more likely you can take advantage of upswings in the market.

Though that can't be guaranteed, historically, the market over time has trended higher.

It also helps to start investing as soon as you can and to do so regularly and on an ongoing basis. This can make a significant difference in the amount of savings you accumulate. If you are like most young people, you might not have a large lump sum to invest today. But if you have a source of regular income, you could set aside part of it each month into a mutual fund or other investment option to begin building your long-term nest egg.

For example, an 18-year-old who is able to put away $200 a month and continues to do so up to age 65 could accumulate $870,370 by the end of that 47-year period. This assumes an average annual return of 7 percent, with no fees or taxes accounted for in the calculation.

Consider what occurs if the same person delayed starting those contributions by 10 years, but all other aspects of the investment (7 percent return, etc.) remained the same. The account would have grown to just $417,462, which is less than half of what was accumulated by starting a decade earlier. Wait 20 years to start, and the account would have reached a value of only $191,200.

Though retirement seems far into the future, a concerted effort to put time on your side and invest early will give you much greater financial flexibility later in life.
