*by*Grzegorz

# Start saving and investing as early as possible

I was thinking about writing this post some time ago but after watching the last short video made by Jack Lempart (in Polish), I figured out that I can’t wait any longer. Additionally, some discussion that I had with one of my friends made it necessary to deal with this topic. What are we talking about? Saving and investing from an early age.

I spent the last weekend with my friends. We have rented a sailing boat to sail a bit on the lakes, sing in the evenings and check what’s new. This is our annual ritual. Lots of topics to talk about, lots of good beer to drink with your best companions. And of course our main rule “What happened on the boat – stays on the boat” ☝😆 But I decided to break this rule today 🙈

During one of our conversations, a friend shared with me how he encouraged his daughter to save and invest. Namely, he signed a contract with her where he wrote that he would double the money invested by her. One of the points of the contract was that the invested money could not be withdrawn for the next 10 years. Brilliant, isn’t it? This is how you can start learning long-term investing from an early age 😆.

The accumulated funds are used to purchase one index ETF based on MSCI ACWI or the FTSE All-World. The best is to choose one which accumulates dividends. Simple, easy and fun. I know that everyone can choose other passive strategies, e.g. the ones I presented in one of the previous posts How to build a passive portfolio? The only limitation is that the amount invested must be sufficient to buy at least one ETF unit. Transaction fees in this case will be the highest possible (minimum fixed transaction fee, not a percentage value). You can minimize the costs by transferring bigger amount of money once a year or choose a broker account that allows free investing (e.g. XTB or DEGIRO or other you know).

In the situation when you want to invest small money it could be better to choose an index mutual fund with a management fee comparable to ETFs fees. Is it possible? Not in every country. It just so happens that in my bank (in Norway) they offer such a fund with a management fee of 0.21%, 0 fees for acquisition and disposal of fund units and a minimum deposit of around EUR 10.

###### What about bonds? Is it worth adding them to your portfolio?

As for the composition of the passive portfolio, how many investors, so many different ideas for the composition of the portfolio. I believe that if we create a portfolio for a person with an investment perspective of 20, 30 or 50 years (we are talking about a portfolio for our child), then such a portfolio should be based 100% on shares. Of course, if someone is very sensitive to high volatility and has trouble falling asleep when his portfolio depreciates, they can compensate for these fluctuations by adding bonds.. In that case it is worth considering buying one ETF Vanguard LifeStrategy 80%, in which we already have a mix of bonds and shares.

###### Let's check the numbers 😀

Those who carefully looked at Jacek’s material probably noted that he uses historical data for the period from 1/1/1986 to 31/12/2020 (35 years). This analysis shows that a person who would start investing 5 years later (from 01/01/1991) would have to contribute 80% more capital per year to achieve a similar result by the end of 2020. Sounds unbelievable isn’t it?

Jacek took one period with historical market returns which had an impact on the final conclusions. Most likely if we chose a different period the results would be different. You can play with data for a different period and check also other passive portfolios. If you want to test, you can do it using Jacek’s software (affiliate link).

I decided to approach the problem more theoretically in order to eliminate the influence of the historical results of financial markets on the final conclusions.

I assume that:

- average annual rate of return on investment is constant at 10%
- I ignore the impact of inflation
- Management fee 0.2% annually
- Transaction fee 0.39% per transaction
- Initial capital EUR 10 000
- Contribution EUR 10 000 annually
- Investing period – 35 years (or 30 years and 25 years)

No surprise, the results are very similar to those presented by Jacek. The numbers don’t lie. To achieve a similar result, an investor who has been on the market for 30 years would have to save 70% more annually than the same investor who started investing 5 years earlier. If the decision to save/invest was postponed for another 5 years (25 years investment period), the saving amount should be increased by 187%. Below you will find a table with results.

As you can see, if theoretically someone would start investing 10 years later, in order to achieve a similar result as an investor with a 35-year time horizon, he would have to save and invest more than twice as much money.

Table below shows a case where we save and invest the same amount once a year but with a different time horizon.

An investor starting 5 years later should expect that portfolio end balance is 38% lower than that with a 35-year time horizon. If we invest only 25 years, we will have almost 63% less on our account. This is almost ⅓ of the capital with a 35-year investment period.

There is one conclusion. Do not postpone the decision to invest. The longer you wait, the more you will have to save later. Just start with small amounts and let the magic of compounding interest work.

Back to the way to motivate children to save and invest, I also decided to introduce the principle “I double your savings, kid” 😆 From tomorrow, we start the learning process of how to save and invest at an early age.

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