The Two Important Traits of a Smart Investor

By TURNER NOVAK

Updated: November 7, 2012, 1:07 PM

Tools

Money Matters »

President of Seidman IPO, Grand Valley State University’s Investment Club, offers tips, tricks, and advice to students about saving, spending, and keeping your head above financial waters in college.

Home |

Latest Entries

The Two Important Traits of a Smart Investor November 7

The key to investing is to start early and be patient. Some years your investments will perform poorly, and some years they will perform very well. If you are investing for retirement, it is very likely you will be saving for at least 30 years. As an investor, your main defense against the volatility of the stock market is to start saving early. This is because every year, the money you have saved will give you a return, whether it is through interest or capital gains.

When saving, time is your best friend. With most investments the return is compounded, which means that instead of getting a percentage of your initial investment every year, you get a percentage of what the investment is currently worth.

Let’s say you start with $1,000, and earn 8% in returns every year. This return is compounded, which means that each year you are gaining 8% of what your investment is currently worth, not 8% of what it was worth in the first year. When your return is compounded, you earn more than if it was not compounded. If you invest $1,000 on January 1st, 2013, it will be worth $2,158.92 in 2023. If you wait 5 years and invest $1,000, it will be worth $1,459.33 in 2023. By starting your investment 5 years earlier
you earned an extra $689.90, and did nothing except watch it grow.

Most investors will add to their investments each year, which is the scenario we will do next. If you invest $1,000 on January 1st, 2013 and expect to return 8% on your investment each year, after 10 years your investment will be worth $16,645.49. If you wait 5 years before you make your investment, it will only be worth $7,335.93 in 2023.

In this scenario, you can see that the amount of returns you earn each year, as well as the total value of your investment at the end of 10 years, is much higher when you begin investing early.

Comparing these last two examples, you can see that the amount of
returns you earn increases greatly when you continue to contribute to your investments during each year.

Let’s try one of these scenarios again, however this time we will use a situation where you are 25 years old, 3 years out of college with a full-time job, and able to save $6,000 a year ($500 a month). You have been slowly saving up money through college in your
bank account and have $10,000, and now realize you should begin to invest it. If you invest that $10,000 on January 1st, 2013 and make $6,000 payments each year for 30 years, your money will be worth $780,325.84 by 2043. If you were to wait until 2028 to start, your investment would only be worth $194,634.37 in 2043. By beginning to invest 15 years earlier, you end up with $585,691.46 more than if you wait 15 years, and you only pay an extra $90,000 over the course of those extra 15 years.

These past examples do not take in to account that you may receive raises, or make additional contributions to your investment. Last, let’s do a scenario exactly like the previous, except we assume you increase the amount you contribute by $100 each year. The total value of your money after 30 years will be $884,529.85. By increasing the amount you add to your investment by $100 a month (an extra $43,500 over the course of 30 years) you increase the final value of your investment by $104,104.01.

One thing to remember is that the amount of return you get on your investment will change each year. Some years you may gain 1%, and another you may gain 25%. There is no way to predict what the market will do, and the best defense against that is to start
early and be patient. The earlier you invest, the more you will gain from interest and have your money do the work for you. You don’t need to pick the best investments that give the highest return, because over time your investments will grow much more than
someone who only invested for a few years. By being patient and continually adding to your investment, your payments will contribute to the total value and increase your returns.

To start getting involved in investing with other students at Grand Valley, check out the Seidman Investment Portfolio Organization, Grand Valley’s investment club that manages a real portfolio of 20 different stocks that is valued at over $40,000.

For more information, email invest@mail.gvsu.edu or visit our website at www.gvsu.edu/invest.

Turner Novak
GVSU Investment Club

Published November 7, 2012 in Money Matters