Everyone knows the earlier you invest, the more you save. But there’s so much more to it. I’ll also let you in on a little secret about quality companies. Of course, it’s not a complete discussion about investing early if I don’t illustrate the essential concept of compounding…
The earlier you invest, the more you save
You may think that it is a no brainer that the earlier you invest, the more you save. But actually, there are two aspects to it.
All of you already know that if you start saving $1,000 every year, that in 10 years, you’ll have saved $10,000. If you start saving five years later, in 10 years, you’ll only have $5,000.
The second aspect is that, the earlier you invest those amounts, the sooner your money starts to work for you. And that’s where compounding comes in. I’ll talk more about compounding in the last point.
In essence, if your end goal is to accumulate $5,000,000 of assets, the earlier you start investing, the less money you need to draw out from your own pocket.
However, the bottom line is that you never lose money, which is one of the 5 Important Investing Concepts.
To reduce the chance of losing money, buy quality, stable companies at reasonable valuations. What’s value? Ben Reynolds wrote a great article about Value + Growth + Dividends = Dividend Growth Investing that explains about value and other goodies.
Quality companies become more valuable over time
Quality, stable companies become more profitable and valuable over time. Given the time-value of money, the earlier you invest in a great company, the cheaper it is.
In the 10-year period of August 31 2006 to 2016 Stella-Jones Inc.’s (TSX:SJ) total returns were 814% or an annualized rate of return of 24.8%. $10,000 invested on August 31, 2006 would have grown to $91,407.
Of course, the hard part is identifying great companies early. Stella-Jones have only paid a growing dividend for 11 years. Given that some dividend-growth investors don’t invest in a dividend-growth stock until it has at least a five-year dividend-growth streak, an investor might have bought Stella-Jones six years ago.
Even so, from August 31, 2010 to 2016, a $10,000 investment in Stella-Jones would have grown to $83,933 for a total return of 539% or an annualized rate of return of 36.2%.
So, don’t shrug off a great company just because you missed the first parts of its growth. If it’s really the quality company that it is, it should continue to deliver.
Identifying the right companies for your portfolio is an essential step but don’t forget to check their valuations to ensure they’re not too expensive. If you overpay for even the greatest company, your returns will suffer.
Is Stella-Jones a good investment today? Check out my recent growth stock analysis on Stella-Jones to find out. Read More