Lesson 8: When to start investing

Time lets compounding happen

Investing early allows time for both your initial investment and then additional money you make from investing, in the form of interest, dividends or capital gains, to be reinvested and make returns. Your gains themselves end up making more gains. The longer you’re invested, the more you can allow this to take place. This is the concept of compound returns. You might have also heard the term “compound interest,” which describes this situation when interest income itself is reinvested to earn more income.

Think of compound returns like a tree with branches. You plant the tree, which begins to grow and send out branches. Each branch then generates branches of its own. Eventually all the branches are making you money with no new input from you. (Except watering, don’t forget that.)

Time gives you the opportunity to diversify

A longer time period lets you diversify more extensively. Remember how diversification is such an important tool? When you first start to invest, you may only have enough money to make a few choices. As you add to your investments, you have the option of selecting more varied choices. This begins to create a diversified portfolio that’s designed to serve you well through many market ups and downs. In addition, as you add money over time, you’ll be able to take advantage of bargains that show up along the way. This is another reason to do your research and be prepared to take advantage of opportunities when they arise.

Time makes you a seasoned investor

The final reason is really that time can improve your own investor psychology. The longer you’re in the markets, the more you’ll likely experience the real-time ups and downs of market fluctuations. Hopefully, more experience will allow you to learn to consistently keep your cool and not overreact to positive or negative market developments. As long as financial markets exist, there will always be another opportunity to invest — short-term gains or losses will seem less significant.

Investing is a marathon, not a sprint. It makes sense to approach it with that mindset.

Dollar-cost averaging is a technique that lets you start investing with small amounts of money and allows market fluctuations to work to your advantage. It also makes it possible to automate regular investing decisions — an easier way to develop good investing habits.

Here’s how it works:

You invest a fixed amount of money regularly into the same investment — this could be an individual stock, ETF or mutual fund — usually at predetermined time periods, regardless of market conditions. Over time, this averages out the cost of your investment and minimizes the impact of market fluctuations.

Because you’re investing the same amount regularly, you’ll buy more units of the investment when the price is low and fewer units when the price is high.