The Benefits of Long-Term Investing, Compound Interest, and Dollar Cost Averaging
If you’re looking to grow your wealth, long-term investing is the right way and is a great option.
But there are a few things you need to know to make sure you’re doing it right.
Of course, all of these areas can be greatly expanded on, but this article is to give you a brief and quick overview of the things you may want to consider carefully, and then seek advice on.
Here are three key benefits of long-term investing:
1. Compound interest
Compound interest is when you earn interest on your interest, or growth on your growth. This means that your money starts to grow exponentially over time. For example, if you invest $10,000 and earn an average annual return of 7%, your investment will be worth $38,696 after 20 years.
2. Dollar cost averaging
Dollar-cost averaging is a strategy where you invest a fixed amount of money into an investment on a regular basis, regardless of the market price (KiwiSaver is a great example of this. Many don’t even know they’re taking advantage of this little-known strategy). This helps to smooth out the ups and downs of the market and can help you to accumulate more units in your funds or KiwiSaver over time.
3. Time
Time is your friend when it comes to investing. The longer you invest, the more time your money has to grow through compound interest. On this subject, you could say that investing is a case of the famous ‘Marshmallow Test’.
Do you know what the Marshmallow Test was?
‘A great lesson in the power of delayed gratification and reward’. It’s dawned on me how much this applies in life, especially in investing/wealth creation/retirement planning.
Some people will, when they experience down markets or volatility, throw up their hands, realise a loss, and walk away. Taking away their one marshmallow (or part of it anyway!) and cutting their losses. Others: The patient – The Advised – The Wise – Will stay the course, and get their ‘two marshmallows’.
And that my friends is as simple as it is. Stay the course, and reap the rewards. Slow and steady wins the race.
If you’re just starting out, it’s important to start small.
You don’t need to invest a lot of money to start seeing the benefits of long-term investing. Even simply investing $50 per week can make a big difference over time.
There are a few different ways to invest your money. For example, we recommend clients look closely at a residential investment property, managed funds, and KiwiSaver.
Residential investment property
Residential investment property can be a great way to build wealth over the long term.
However, it’s important to do your research and make sure you’re buying a property in the right location, that you’re getting the right rent, that the property maximises tax efficiencies, and that you can afford it – In best and worst case scenarios/modelling!
You’ll also need to ensure you factor in all related running costs and set up the mortgage correctly.
You can probably see where I am going here: Get advice! You need to be very strategic about this asset class. Many rush in and get it very wrong.
Managed funds
Managed funds are a type of investment that pools money from a group of investors and invests it in a variety of assets, such as cash, shares, bonds, commodities, crypto, and property.
Managed funds can be a good option for investors who want to diversify their portfolios and reduce their risk.
Again, a lot to consider here in terms of selecting the right fund, and the right fund manager that aligns with your unique financial position and goals (and values).
KiwiSaver and Long-term investing
KiwiSaver is of course a ‘government-backed’ retirement savings scheme. Which is a good thing!
Because it brings rules and benefits to you the investor.
Namely: Free money and it’s locked in! KiwiSaver is a good option for investors who want to save for retirement and enjoy the tax efficiencies that the PIE Tax structure offers (the same can be said with managed funds if you select correctly).
No matter which investment option you choose, it’s important to get professional financial advice.
A financial adviser can help you to create a financial plan that meets your individual needs and goals.
The Necessity of Getting Financial Advice from a Qualified Financial Adviser
When it comes to investing, it’s important to get professional financial advice.
A financial adviser can help you to create a financial plan that meets your individual needs and goals.
A qualified financial adviser will have the knowledge and experience to help you make sound investment decisions.
They will also be able to help you to understand the risks involved in investing and to develop a strategy to mitigate those risks.
In New Zealand, we have a strict regulatory framework overseeing our industry, with the Regulator being the Financial Markets Authority or FMA.
It’s important to remember that not all financial advisers are created equal. Some advisers are more experienced than others.
When choosing a financial adviser, it’s important to ask about their qualifications and experience. You should also ask about their fees and how they are compensated.
It’s also important to choose a financial adviser whom you feel comfortable with.
You should be able to trust your adviser and feel confident that they are putting your best interests first (after all, this is the law in NZ!).
If you’re looking for financial advice, be sure to do your research and choose a qualified financial adviser whom you feel comfortable with.
Self-Made Wealthy Financial Advisers
Now this topic is one that is rarely talked about!
There are many financial advisers in New Zealand.
A great question to ask from whom you choose to work with is if they themselves are self-made and wealthy.
Are they ‘talking the talk and walking the walk’?
This isn’t part of the law governing the industry of course. You certainly don’t need to be self-made wealthy to qualify as a financial adviser in NZ, which makes sense.
But, some would see value in seeking advice from those who have carved the path before them.
Not one staring at a map at the start of the journey. These kinds of advisers have a wealth of experience and knowledge that they can use to help their clients achieve their financial goals.
Self-made wealthy financial advisers have a unique perspective on long-term investing
They have seen the market go up and down, and they have learned how to invest in both good and bad times. They also have a strong understanding of the risks involved in investing, and they can help their clients to develop strategies to mitigate those risks.
If you are looking for a financial adviser who can help you to achieve your financial goals, be sure to consider if a self-made wealthy financial adviser is something important to you.
These advisers have the knowledge, experience, and perspective that you need to make sound investment decisions.
Conclusion for long-term investing
Long-term investing, compound interest, and dollar cost averaging are all important concepts for investors to understand. By taking advantage of these concepts, investors can grow their wealth over time.
It’s also important to get professional financial advice from a qualified financial adviser. A financial adviser can help you to create a financial plan that meets your individual needs and goals.
Go well!
Daniel Carney
Financial Adviser
Goodlife Financial Advice