You may have heard it said, “No risk, no reward.” But did you know that time can actually decrease your risk while increasing your reward?
Investing: Risky business?
When some people think of investing, they focus on the potential for great rewards—the possibility of picking a winning share that will increase in value over time.
Other people focus on the risk—the possibility of losing everything in a market crash or on a bad stock pick.
Who’s right? Well, it’s true that all investing involves some risk. It’s also true that investing is one of the best ways to build your wealth over time.
In fact, there’s typically a direct relationship between the amount of risk involved in an investment and the potential amount of money it could make.
Different types of investments fall all along this risk-reward spectrum. No matter what your goal is, you can find investments that could help you reach your goal without taking on unnecessary risk.
Time is on your side
Here’s the secret ingredient that can make investments less risky: time.
But there’s a caveat.
If you invest in just a handful of investments or only within the same industry, time won’t necessarily make your portfolio any safer.
The reason it works for diversified investment portfolios that incorporate a range of asset classes (i.e. bonds), regions and markets is that over time, there tend to be more “winners” than “losers.” And the investments that gain money offset the ones that don’t do as well.
The more time you have, the more you benefit from compounding
Not only can the passage of time help lower your investment risk, it can potentially increase the rewards of investing.
Imagine you place one checker on the corner of a checker board. Then you place two checkers on the next square and continue doubling the number of checkers on each following square.
If you’ve heard this brainteaser before, you know that by the time you get to the last square on the board—the 64th—your board will hold a total of 18,446,744,073,709,551,615 checkers.
While there’s no guarantee you can double your money every year, the principle behind this – known as “compounding” – is important to understand that when your starting amount is higher, your increases are higher too. And over time, it can add up to be a material increase.
For example, if you earn 6% on a $10,000 investment, you’ll make $600 in the first year. But then you start the second year with $10,600—during which your 6% returns will net you $636. This is a hypothetical example that does not take into consideration investment costs or taxes.
In the 20th year of this example, you’ll earn more than $1,800—and your balance will have increased more than 200%.
A caveat: reinvesting is key
If you take your earnings out of your account and spend them every year, your balance will never get any bigger—and neither will your annual earnings. So instead of making more than $20,000 over 20 years in the hypothetical example above, you’d only collect your $600 every year for a total of $12,000.
If you instead leave your money alone, your “earnings on earnings” will eventually grow to be larger than the earnings on your original investment – and that’s the power of compounding!
Understanding long-term investing can be confusing, that is why we are here to help. Contact us today on 1300 79 80 38 to find out more.
If you would like assistance getting your accounts under control as we approach the end of financial year, call us today on 1300 79 80 38.
Visit our Financial Knowledge Centre where you will access educational videos and articles, plus join our monthly e-Newsletter to help improve your financial knowledge.
If this article interested you and you would like to speak to Pat Casey on the phone, select a time to speak Pat – Financial Planner Sydney.
At Assure Wealth we specialise in helping busy, successful families structure their finances to achieve greater wealth and financial peace of mind.
Disclaimer: The information provided on this website has been provided as general advice only. We have not considered your financial circumstances, needs or objectives and you should seek the assistance of your Walker Lane Pty Ltd Adviser before you make any decision regarding any products mentioned in this communication. Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither Walker Lane nor its related entities, employees or agents shall be liable on any ground whatsoever with respect to decisions or actions taken as a result of you acting upon such information.
Assure Wealth Pty Ltd ABN 31 965 466 780 Corporate Authorised Representative no. 1244817, Patrick Casey Sub-Authorised Representative no. 1244748 of Walker Lane Pty Ltd ABN 70 626 199 826, an AFSL holder No 509305.