Investing is a crucial element of building wealth and achieving financial goals. However, many investors make the mistake of waiting until the last moment to invest. While it may seem like a good idea to invest when the market is at its peak, investing at the last moment can hurt your returns in several ways.
In this article, we will explore why investing at the last moment can hurt your returns with facts and figures to help you make informed investment decisions.
One of the primary reasons why investing at the last moment can hurt your returns is missed opportunities. Waiting until the last moment may cause you to miss out on opportunities to invest in assets that have the potential for growth. For example, if you had invested in Apple or Amazon in the early 2000s, you would have seen significant returns today.
Furthermore, waiting until the last moment can also cause you to miss out on the benefits of compound interest. Compound interest is the interest earned on the principal amount and any accumulated interest. Over time, compound interest can significantly increase your returns. For instance, if you had invested $10,000 in an index fund that had a 7% annual return 30 years ago, your investment would be worth over $76,000 today.
Investing at the last moment can also expose you to market volatility. Market volatility refers to the rapid and frequent changes in the value of securities in the market. If you invest during a market downturn, you may experience losses that could have been avoided if you had invested earlier or diversified your portfolio.
For instance, let’s say you invested $10,000 in the S&P 500 index at the beginning of 2022. If you had invested at the end of the year, your investment would have returned approximately 15%. However, if you had invested at the beginning of March, your investment would have decreased by approximately 20% due to the market downturn.
Investing at the last moment may not give you enough time to achieve your investment goals. For example, if you are investing for retirement, waiting until you are close to retirement age may not give your investments enough time to grow sufficiently. According to a study by Fidelity Investments, the average 401(k) balance for individuals aged 55-64 is $144,000. However, this amount may not be enough to sustain an individual’s lifestyle in retirement.
Investing at the last moment can cause you to make emotional decisions that are not based on sound investment principles. For example, you may be more likely to panic and sell during a market downturn, which could lead to significant losses.
A study by Dalbar Inc. found that the average investor underperformed the S&P 500 by 4.35% from 1985 to 2022. The study attributed the underperformance to emotional decision-making, such as selling during market downturns.
Investing is a long-term strategy that requires patience, discipline, and a sound investment plan. Investing at the last moment can be risky and may not yield the returns you are hoping for. To achieve your investment goals, it is generally better to start investing early and regularly, and to diversify your portfolio to minimize risk. Remember, investing is a marathon, not a sprint.