Learning about investing can feel like reading from some giant, esoteric tome. The more you get into it, the more you realize that you need to learn new jargon and Greek letters and, where did I put my old TI-84 again?
This article is not that.
Instead, take a look at the following three charts. Each illustrates an important lesson that, if internalized, will hopefully make you a wiser investor.
The virtues of investing early
It can be hard (read: next to impossible) to know exactly when to put money in the market to maximize your returns. But if you're a younger investor, the best time to invest was yesterday. And the second-best time is now.
That's because the key to growing your investments over the course of a lifetime is compound interest. And the best way to maximize compound interest is to let it do its work for as long as possible.
"The greatest money-making asset anyone can possess is time," Ed Slott, publisher of IRAHelp.com, told CNBC Make It.
Case in point: the chart above, which shows the investing results of three people who make an initial investment of $1,000 and invest $200 per month thereafter. From the time they begin investing until they retire at 67, each earns an annual return of 8% per year.
The only difference: One starts investing at 22, one starts at 27, and the third starts at 32.
The investor who started early wins by a landslide, and not because they invested all that much more.
After 45 years in the market, the investor who began at 22 has put $109,000 into the market — just $24,000 more than the investor who began 10 years later. But at nearly $1.1 million, their total more than doubles that of their counterpart who got a later start.
The case for diversification
The chart above plots 12 asset classes over the course of the 20 years ending in August 2023. On the X-axis, you have standard deviation, a measure of volatility that essentially tracks how much an investment fluctuates in price. The Y-axis charts 20-year annualized return.
You may notice that an investor favorite comes out looking pretty good here. Large-company U.S. stocks (the ones in popular indexes such as the S&P 500) turned in the highest returns of any asset class despite several — including all other stock categories — coming with more volatility.
It's good, then, that these stocks make up the core portion of many investors' portfolios.
However, you'd still be wise to diversify, financial experts say. For one thing, adding other assets can help boost returns. While U.S. stocks have done well of late, past performance is no guarantee of future results.
"We've had almost 10 years of international stocks not performing, but there's also something called reversion to the mean," Sam Stovall, chief investment strategist at CFRA, told Make It. "Eventually, they'll come back to the fore. And like Wayne Gretzky used to do, skate to where the puck will be, not where it is."
Small- and midsize-company stocks are likely to eventually have their day in the sun as well, experts say.
Plus, holding a diversified mix of assets can help smooth your ride over time. After all, even though large-company stocks were less volatile over 20 years than other types of stocks, S&P 500 investors still had to stomach drops of 56.8% during the 2007-2009 bear market, 33.9% in 2020 and 25.4% in 2022.
By holding investments that move in different ways based on different market forces, you effectively ensure that something in your portfolio is always working, even when your core stock holding is faltering.
Remembering 1987
It can be easy to get wrapped up in the daily drama of the economy and stock market. Will the Fed get things right? Will it all come tumbling down?
When things in the market get hectic, take a second to remember 1987.
For those readers who weren't following market news back then, just know it was bad. On Oct. 19 of that year, the Dow Jones Industrial Average fell 22.6% — the largest one-day drop in that index's history. The day came to be known as Black Monday.
Headlines at the time were terrifying. Crash! Panic! Bedlam on Wall Street! All told, between Aug. 25 and Dec. 4, 1987, the broad U.S. stock market lost 33.5%.
Headlines will get scary again. And your portfolio will look as ugly as investor portfolios looked in 1987. When that happens, return to the chart above, or type "S&P 500" into Google and click "Max."
The historical upward trajectory of the stock market reduces what was a catastrophe at the time to a blip on your screen. Eventually, all downturns have become blips.
As long as the market continues to behave as it always has, whatever your portfolio is doing today, tomorrow or next year ultimately won't matter much over the course of your decadeslong career as an investor.
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