Many people recognise the need to grow their money.
This is especially so in a world where inflation has reared its ugly head, causing the prices of goods and services to shoot up.
The recent surge in interest rates, largely the result of the US Federal Reserve’s policy moves, makes loans more expensive to service and result in a larger cash flow drain.
These events have made people more worried about having sufficient funds in their bank accounts when they eventually retire.
Share investing is an effective method of growing your wealth and generating a useful source of passive income through dividends.
We offer four compelling reasons why you should start investing as soon as you can.
1. A wider breadth of investment choices
The great thing about starting young is that you are more open to different investment choices.
Investments can be split into two main categories – growth stocks and income stocks.
Growth stocks generally do not pay a dividend and these businesses reinvest their profits for growth.
Senior investors usually rely more on dividend-paying stocks as growth stocks may seem too risky and volatile for them.
If you start investing early, you will have a longer runway for exploring different types of stocks, be they growth, income or a mixture of both.
As you do not have to rely heavily on dividends as a source of passive income, you can afford to invest in growth stocks such as cybersecurity expert Crowdstrike (NASDAQ: CRWD) or artificial intelligence leader Palantir (NYSE: PLTR).
Such stocks are growing rapidly and neglect to pay dividends as they are reinvesting their cash to grow the business further.
2. More time for compounding
With a longer runway available for investing, compounding can also work its magic.
Compounding is a process whereby you reinvest the money churned out by existing investments into the very same investments that generated the cash.
A great example is that of dividend-paying stocks.
For instance, assume that DBS Group (SGX: D05) paid you a dividend of S$3,672 over one year.
You will need to own 1,700 shares of DBS to achieve this as the lender pays out an annual dividend of S$2.16 per share.
This dividend can then be reinvested by buying another 100 shares of DBS, thus upping your stake to 1,800 shares.
By the next round of dividends, you will receive S$3,888 of dividends.
The beauty of compounding is that you can do it with shares of any company, be it DBS group or a REIT such as Mapletree Logistics Trust (SGX: M44U).
This cycle of obtaining and reinvesting dividends can be rinsed and repeated over years or even decades.
The younger you start, the more time you have for compounding to grow your investments and enlarge your passive income flow.
3. Learning and recovering from mistakes
As investors, you will inevitably make mistakes during your investment journey.
Even Warren Buffett, arguably one of the best investors in the world, has admitted to his fair share of errors.
When you start investing early, you have more time not just to learn from mistakes, but also to recover from them.
Younger investors usually have limited capital to put to work in the market, thus ensuring that your exposure is not so large that you cannot sleep peacefully at night.
Making mistakes at this early stage is commonplace and may lose you some capital, but won’t make a serious dent in your overall financial well-being.
As you grow and mature as an investor, you will also become wiser and learn to avoid the mistakes you made along the way.
This iterative process is how you can slowly improve your investment process to become a better investor.
And when you do so, your investment results should also improve along with your acumen.
4. Businesses need time to grow
Finally, and most importantly, businesses need time to grow and to implement business development initiatives.
If you are investing for growth, time is your best friend if you own a strong business.
The company may utilise a variety of methods to grow its revenue, profit, and cash flows.
These include organic growth (new product line, higher pricing or building a new factory) or acquisitive growth (purchasing another company or a new line of products).
Whichever method the business uses, time is needed to integrate the acquisition, ready the new facility, or market new products.
Hence, the earlier you invest, the more time you have to reap the rewards that growth companies can provide.
As a simple example, Apple (NASDAQ: AAPL) has grown by leaps and bounds over the last decade.
For the fiscal year ending 30 September 2013 (FY2013), Apple’s revenue and net profit were US$170.9 billion and US$37 billion, respectively.
A decade later, the iPhone manufacturer’s FY2023 revenue and net profit have grown to US$383.3 billion and US$97 billion, respectively.
Apple’s share price has risen by eightfold over the past decade, from US$23.90 to US$196.89.
This could be the fastest way to jump from a “newbie” investor to a seasoned pro. Our beginner’s guide shows everything you need to know to buy your first stock and beyond. Click here to download it for free today.
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Disclosure: Royston Yang owns shares of Apple and DBS Group.
