Investing for beginners: the cost of delay

Start soon, even if you start small

If I had a super power, I reckon it would be procrastination.

I am superbly gifted at putting things off. Delaying decisions, worrying about the best outcome, generally fiddling while Rome burns.

In money terms, that sometimes works well. Faffing about the best buy or waiting for a better option can mean I spend less.

Know where it wallops me in the wallet? Investing.

Because what really matters when it comes to investing is time. I took ages to get started, which meant I missed out on a big chunk of money.

Find out how I got hit by the cost of delay – so you don’t have to!

Long term chance of shares beating savings

Missed out on stock market growth

Over the long term, stock markets have tended to rise. That’s the first reason it’s important to get started, rather than staying on the sidelines.

Sure, markets don’t grow in a straight line. Strap yourself in for a bumpy ride as prices hurtle up and down. You could even get back less money than you started with, if you sell when prices are low, rather than hanging around to see if they perk up again. That’s why investing is only suitable for money you can tie up for at least five years, and ideally more.

But stick around for long enough, and investing consistently does much better than staying in cash, according to number crunching for more than a century by the Barclays Equity Gilt Study.

Missed out on compound interest

Know how else time helps and delay hinders? Compound interest.

Simple idea, mind-blowing impact, given time.

Previous post: The one thing you need to know about money 

Compound interest is the money paid on interest you have already earned or paid.

Stick money in a savings account, and after a year you’ll earn some interest. Great!

Then after the second year, you get interest not just on your original savings, but extra interest earned on the interest from the first year.

After three years, you’re getting interest on your original savings plus interest on the interest from the first year plus interest on the interest from the second year – and so it goes on, earning interest on all the interest you’ve earned before.

With investing, compounding works when you earn dividends on your investments. If you reinvest the dividends, you earn more dividends year after year on the money you reinvest.

Compounding is sneaky because it starts slowly, but then soars off into the stratosphere. It’s not a straight line, but a curve that shoots skywards, taking your balance with it.

More on the power of compounding returns

Missed out on making the most of smaller sums

If I’d started investing earlier, I’d have had more time to ride out stock market peaks and troughs and more time to get a boost from the rocket of compounding returns.

It’s the magic combination of long-term stock market growth and compounding that can take small sums and turn them into big balances – given enough time!

Compounding returns are the reason that if you start paying £50 a month into a pension when your baby is born, and continue until they reach 18, they could be looking at a pension pot of nearly £200,000 by the time they hit 68, even if you didn’t add a penny afterwards.

(This assumes that overall the money grows at 5% a year, after charges)

 It’s time that transforms the £10,800 contributions to nearly £200,000.

Starting early makes reaching your money goals more affordable, because smaller amounts have the time to roll up into bigger balances.

Pensions and ISAs: shelters for your money

Missed out on tax shelters

If I’d invested earlier, I could have made the most of the tax breaks on offer.

Currently, it’s possible to shovel up to £20,000 a year into an individual savings account (ISA) and – for those of us earning under £150,000 a year – up to 100% of earnings, max £40,000 a year, into a pension. ISAs and pensions have different pros and cons, but fundamentally both let your money grow without the taxman taking a cut.

That annual ISA allowance runs from 6 April one year to 5 April the next. If you don’t use it, you can’t get it back, but have to use next year’s allowance instead.

Plummeting interest – from 6% to 1.1% in 6 months

My own cost of delay

Now, I was late to the party when it comes to investing. I don’t come from a background where anyone dealt in stocks and shares. I dutifully paid into a pension, raised a deposit for my first flat, and kept any extra in a good ol’ fashioned saving account.

I put £500 in my first cash individual savings account (ISA) back in 2001. It was just after the dot com boom went bust. I wasn’t keen to go anywhere near a stock market!

Afterwards, despite writing about investing for years, I didn’t actually switch my cash ISA money into investments until 2015. By then, I’d stashed away £28,600 from earnings with a bit of interest on top.

I’ve been trawling back through building society passbooks and bank statements for six different cash ISAs, as I moved my money around chasing best buy interest rates. It looks like over the 14 years I paid in just over £21,700 and earned nearly £6,900 in interest

*Short pause to remember interest on my cash ISA peaking at 6.5% before the 2008 financial crisis. Wish interest on savings accounts weren’t quite so rubbish nowadays*

That works out as contributions of just under £126 a month over 14 years.

Here’s a calculation I’ve never done before, for fear of quite how painful it might be.

Let’s take a time machine back to 2001 and stick my £500 in a tracker fund that follows average share prices on stock markets all over the world, aka the FTSE All World Total Return index.

If I had added £126 a month for the 14 years, my balance would have hit £33,512 after costs of 0.5% a year, by the time I finished procrastinating and started investing.

(And many thanks to Vanguard for crunching those numbers so I didn’t have to!)

Those years saw some great times for saving, with that high point of 6.5% interest on my cash ISA.

Those years also saw some disastrous times for the stock market, with the massive plunge during the global financial crisis.

But despite all that, I would still have emerged nearly £5,000 better off if I’d invested instead of staying in a savings account.

During the time I was saving, from 2001 to 2015, the FTSE All World Total Return index grew at around 6.3% a year on average, before any investment costs. Bringing that up to date, it’s actually done even better, growing at 7.3% a year on average since 2001. Long term, the stock market does tend to do way better than stuck in savings.

Stockmarket while I was stuck in savings – spot the big dip during the financial crisis Source: FTSE All World Total Return index via Bloomberg

Don’t get hit by the cost of delay!

With the wonderful 20:20 vision of hindsight, I wish I’d started investing earlier.

If I could hop back to 2001, I’d tell myself to stop worrying about the ‘best’ way to start investing. There isn’t a ‘best’ way that suits everyone – but there are loads of options that are just fine.

I’d tell myself it was more important just to get started, even with only £25, £50 or £100 a month. Use a fund that would spread my money over lots of investments all over the world, make sure it didn’t charge huge fees and stick it in a ISA. Aside from any tax breaks, using an ISA also means I wouldn’t have to mention that money on my tax return! Just start, and expect to learn more as I went along.

So if you have some spare money and are ready to invest, don’t get hit by the cost of delay like I did!

If you’re equally bewildered by the choice of investments and platforms and want something super simple, check out the Vanguard LifeStrategy funds.

Previous post: Investing for beginners: which Vanguard LifeStrategy fund is right for you?

I opened an account with Vanguard nearly two years ago, back in May 2017. I liked the fact it only charges 0.15% a year for the platform, and 0.22% for the LifeStrategy funds, so I could invest for just 0.37% all in. It only took a few minutes, and that investment has grown 9.18% since, far more than I would have got stuck in a savings account.

Vanguard also offer a FTSE Global All Cap index fund for just 0.24% a year, so only 0.39% a year including the platform cost.

Open an ISA with Vanguard Personal Investor 

With Brexit looming, you might wonder whether to use your ISA allowance before April 5. Who knows whether the stock market will go up, down or sideways after the end of March?

But as all the investment experts say, it’s ‘time in the market, not timing the market’ that matters.

Even if everything goes to hell in a handbasket, I’m willing to bet that markets will bounce back over time and end up higher than they are today.

So if there’s a dream you’re saving for, such as the chance to retire or education for your children, consider starting soon rather than getting hit by the cost of delay.

Find out more in our Twitter chat

If you’d like to find out more about starting to invest, do join our Twitter chat on Thursday 14 March from 1pm to 2pm. I’ll be online at @MuchMore_Less with Lynn from Mrs Mummypenny to share our own experiences, plus James Norton, a senior investment planner from Vanguard. Just use the hashtag #AskVanguardUK if you have any questions and to track down the conversation. See you there – it’ll be fun!

Now – over to you. Ever wished you started investing earlier? If you haven’t started investing, what’s stopping you?

Check out Mrs Mummypenny’s post about her own experience of the cost of delay

This is a collaborative post with Vanguard Asset Management

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