Start Investing Now, Even if You Stink

Start investing now, even if you stink

Photo courtesy of Dermot O’Halloran

Investing is one of those things that many people know is important but still struggle to get started with.

Fear is a big reason why.

People hear stories of huge market market declines and they fear losing their money. They also hear all about the seemingly complicated strategies discussed by their friends, co-workers and so-called “experts” in the media, and they fear that they don’t know enough to be successful. Or they fall into the trap of analysis paralysis, where the sheer number of options overwhelms to the point that they fear making the wrong choice.

This fear is very real for many people, and the unfortunate consequence is that it prevents them from applying one of the most powerful investment tools at their disposal: starting early. The truth is that time is one of your best friends when it comes to investing and that your returns don’t truly start mattering all that much until enough time has passed for you to build some real wealth. So today I want to present a little information that should temper some of that fear and help you feel a little more comfortable getting started with investing.

Early investment returns have little impact

In a recent article, legendary retirement researcher Wade Pfau looked at the importance of the investment returns earned in each year during both the working/saving years and the retirement years (see the full article here: Lifetime Sequence of Returns Risk). Assuming a 30-year investment period followed by a 30-year retirement, in which years did the returns earned have the biggest impact on whether an individual would have enough money to last a lifetime?

importance of investment returns

This graph taken from Wade Pfau’s article on the Lifetime Sequence of Returns Risk

Let’s look at the graph above, taken directly from that article, and focus on years 1-30 (years 31-60, starting where the bars get really tall, represent the actual retirement years and are the subject of a different discussion).

The height of each bar represents the impact of that year’s investment returns on the final amount of money accumulated by retirement. In other words, how important are the returns for that given year to your end goal of having enough money to retire?

Well, it turns out that in those first few years of saving, the investment returns have very little significance. You can barely even see a bar before Year 3, and it isn’t until Year 8 or 9 that the a single year’s returns helps to determine even 1% of the final outcome. Whether your returns in those first few years are good or bad, they have little little impact on whether you will actually reach your end retirement goal.

What does this mean for you?

What this means is that you should start investing right now, even if you stink! With those first few years of returns being relatively unimportant, you don’t need to worry about doing something wrong or understanding all of the little nuances that can go into investing.

Even if you mess up, you’ll be okay because it takes about a decade before your returns start to have a significant impact on where you end up. So you don’t have to be afraid of making a mistake, and you definitely shouldn’t feel like you need big returns to make it worth your while.

But if your early returns don’t have much impact, why should you even focus on investing at all?

Well if you want to eventually have enough money to retire, you need to accumulate enough money so that your returns eventually DO matter. See how those lines start getting taller and taller? That only happens if you’ve put enough money in. So this gives even more weight to the fact that your early years of investing should be focused much more on how much you’re saving rather than the level of returns you’re earning. Your contributions in those first few years will form the foundation of your retirement plan, allowing you to benefit later from the magic of compound interest.

In the meantime you can learn your way through investing slowly, trying different things out and finding a strategy that works for you without worrying that a mistake now will ruin you forever. Recognize that there will be ups and downs, but that’s all part of the process even when you know what you’re doing.

Don’t let the downs scare you. Instead, use them to learn about yourself and your investment style and remember that when you’re starting early you have time to recover from even big mistakes.

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34 Comments... Read them below or add one of your own
  • Brian @ Luke1428 October 23, 2013

    Good stuff here Matt! That graph is just another illustration of how patience is key when it comes to investing. I’ll really be looking forward to year #31!

  • DC @ Young Adult Money October 23, 2013

    Good words, Matt! I think it’s important for 20-somethings in particular to JUST GET STARTED. If you get used to having contributions to your retirement account happen each paycheck or each month you are doing yourself a favor. One of the smartest things I did when I started my first job out of college was to start the 401k contributions right away.

    • Matt @ momanddadmoney October 23, 2013

      You make a great point about simply getting used to having the money taken out. You start to forget that it was even there in the first place, and that can be pretty powerful.

  • John S @ Frugal Rules October 23, 2013

    I could not agree more Matt – getting started is such a huge hurdle that so many get tripped up by. I don’t care what the amount is, just get started and you’ll be glad you did in the long run.

  • Andrew October 23, 2013

    Great article…and very timely as it is apparently Save for Retirement Week! =) I think it’s a great message to just start investing! I’ve often heard people with analysis paralysis say they’ll wait for the markets to settle down (when would that be?), or for them to do more research. As you stated…the first few years have little impact. I remember checking my accounts all the time and it was a little depressing because the amount was so low, or because the stock market was performing well. But give it some time and the growth you see is pretty amazing. Just have to be patient!

    • Matt @ momanddadmoney October 23, 2013

      Waiting for the markets to do “X” is such a kiss of death. The reality is that it will probably never feel “just right” and if it does that’s actually probably the exact wrong time. Just get going and stick with it. You’ll be glad you did.

  • Holly Johnson October 23, 2013

    We didn’t start saving for retirement until our late 20’s but it was still better late than never. I try not to think too much about the ups and downs. We just keep saving on a monthly basis.

  • FeelingFinancial October 23, 2013

    That’s a good explanation, and so hard especially for young people to wrap their minds around. If you’ve only got $100 or $1000 saved up, it kind of doesn’t matter if you lose 20% this year. In the big picture at least… but that’s really hard to imagine when you’re starting. Even if you’ve got more and you’re young, big losses might not be that bad if you can hang in there (but they still always hurt a little).

    • Matt @ momanddadmoney October 23, 2013

      Exactly. It might feel like you just lost all your money, but in the long run it barely matters at all. Which is why it’s best to get those mistakes out early.

  • Done by Forty October 23, 2013

    Great article, Matt. I’ve tried telling this lesson to friends who are just starting out without offending them. But the reality is that they have so little money invested at the beginning that returns barely matter. Hell, if AA or index vs. active is intimidating, just pick whatever and throw a lot of money at it. You can fix it next year when you learn more. The key is that you invest, not what you invest in, when you’re first starting out.

  • Alexa Mason October 23, 2013

    I think you should do a post about the best place to start investing for beginners and where you can open up investment accounts with a small initial deposit. I would be very interested to read your suggestions.

  • Kyle James October 23, 2013

    Everyone pretty much stinks at investing in one way or another, right? Even the so called “experts” – I invest in mutual funds with a risk level that I am comfortable with. I then forget about it (I only look at quarterly statements) and over the long term I have made 15% returns the past 8 years.

    • Matt @ momanddadmoney October 23, 2013

      I like that approach a lot. Other than keeping track of rebalancing, there’s really no need to even look at your investments if you’ve picked them right. They should be able to run pretty much on auto-pilot.

  • Tonya October 23, 2013

    I agree that you shouldn’t let fear get in the way of trying. Even if you start small you gotta start somewhere.

    • Matt @ momanddadmoney October 23, 2013

      Well said. Starting with something small and losing a little is better than not starting.

  • Debt, Dividends, & Diversions October 23, 2013

    Good post. As a new investor (401k aside), I am embracing the concept of it is “better to start small, than not start at all.” You’ll make mistakes, make some money, and probably lose some money early on, though likely not too much. However…the experience you gain will be worth it, as you can make smarter decisions as your investment grows. I used many of the same arguments in a recent post on why I feel dividend investing is good for new parents.

    Have a good one.

    • Matt @ momanddadmoney October 23, 2013

      I’m not personally a big fan of a dividend-focused approach, though it’s better than a lot of other strategies. But I’m right there with you on the rest of your points.

  • krantcents October 23, 2013

    Time is the most important element in investing! It takes care of volatility and mistakes.

    • Matt @ momanddadmoney October 23, 2013

      Well volatility is an interesting one. Though the range of possible returns decreases, the range of possible end dollar amounts (which is what you actually care about) increases. So I don’t think volatility actually decreases with time, even though that’s the popular perception. There’s still a lot of risk involved even with a long time frame, but you have to give yourself a chance to take advantage of the upside.

  • Edward - Entry Level Dilemma October 23, 2013

    Under a best case scenario, I’ll be able to retire on just my contributions over the years. In that case, returns are just icing on the cake!

  • Adam Kamerer October 23, 2013

    I was reading the Investing chapter of the Wall Street Personal Finance Guidebook tonight, and have done a bit more reading on the topic lately online. I feel like I understand investing a little better, but at the same time, it feels very overwhelming.

    Our big priority right now is paying down our debt, but I think I’m ready to set aside some small amount of money to play around with investing. This post comes at a good time, Matt — it’s good to hear that screwing up in the early years won’t matter so much in the long run.

  • AvgJoeMoney October 24, 2013

    Excellent example. I always had trouble explaining to people that it’s okay to suck when you start…there’s nearly nothing at risk.

    • Matt @ momanddadmoney October 24, 2013

      Exactly. It can be tricky to emphasize both the importance of starting AND the unimportance of doing well, but it’s the truth. It’s the habit and the experience that you really need to build.

  • Laurie @thefrugalfarmer October 24, 2013

    This has given us lots to think about, Matt! We are contemplating throwing a small amount of cash into an investing account outside of our retirement funds, but I’ve always been a little leery as money is tight.

    • Matt @ momanddadmoney October 24, 2013

      Are you already maxing out your retirement funds? If so that can be a great idea if you’ve got some extra cash. But there’s also nothing wrong with paying attention to some other priorities first, especially if you’ve already got the retirement accounts handled.

  • Anton Ivanov November 2, 2013

    Great inspirational post! I’m featuring it in my latest roundup.

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