Why you should start investing early

If you’re thinking about getting started in investing, don’t wait. New analysis shows that the sooner you start investing, the greater your returns will be.

Beginner investors might be wondering what the best time to start investing is. The short answer is, the sooner the better.

It is a well-known stock market aphorism that time in the market is better than timing the market. This saying refers to the simple mathematics of compound interest. The longer your investments are given to grow, the larger they will become.

Three in five investors (59%) wish they had started investing earlier, according to a study by the investment trust Alliance Witan of 1,000 UK adults with assets of £10,000 or more. Half of investors said it took them a long time to grow comfortable with the idea of investing, and 72% think that more effort is needed to make the public feel more comfortable with it.

“With experience comes confidence, and ultimately, comfort,” says Mark Atkinson, senior director at WTW, which manages Alliance Witan. “Much is rightly being made of the need to change the culture around investing in the UK.”

Brits can be quite risk-averse when it comes to their finances, the research reveals. 22% of respondents said they were planning to put more into cash savings.

Paradoxically, younger investors are more likely to say that they wish they had started investing earlier: three quarters of 18-35 year olds asked wished they had started sooner, compared to two thirds of 35-54 year olds and 45% of investors aged 55 or over.

Does investing early yield greater returns?

The fundamental concept of investing relies on compound interest. Effectively, this means giving your investments time to generate returns, reinvesting these, and realising greater and greater returns over time.

The sooner you start, the greater your returns – even if you invest the same amount in total.

Trading platform IG ran analysis for MoneyWeek on the impact of starting to invest at 20 years old, versus getting started at 40.

Someone aged 60 years old now who put £10,000 into the FTSE 100 every year since they were 40 would now have a portfolio worth £388,253.09, off a total investment of £200,000.

If that same person had invested the same amount over a 40-year period – so starting at 20 years old and investing £5,000 every year – their portfolio would now be worth more than twice as much, at £878,159.58.

If these investments had been put into the S&P 500, which has outperformed the FTSE 100 over the same period, then starting at 40 with £10,000 annual investments would result in a portfolio worth £572,749.99 – but starting at 20 with £5,000 annual investments would have resulted in a portfolio worth £2,212,962.78.

Is now the right time to start investing?

Investing is not without risks, and Atkinson highlights that “those considering starting investing should fully understand the risks, and ensure investment decisions are proportionate to their immediate financial commitments and long-term goals”.

But he also believes the government is taking the right steps in boosting efforts to improve this financial literacy and give people the confidence they need to start investing.

“Earlier and better education will help build people’s confidence and understanding, empowering UK households to reap the benefits of long-term investing,” he said.

Those considering getting started in investing can read MoneyWeek’s explainers on investment funds for beginner investors or the best investment trusts for beginner investors for ideas as to where to start.