When it comes down to building wealth, most individuals focus primarily on earning and secondarily on how much they can invest. Still, one more vital concept that is generally overlooked in wealth-building discussions is the immense value of time.
Therefore, what must be casually disregarded is the impact and importance of time. This is because time is one of the biggest drivers of long-term wealth: the longer you stay invested, the more time your investment has to compound.
Warren Buffett famously said, “Someone is sitting in the shade today because someone planted a tree a long time ago.” This quote perfectly captures the immense significance of the power of compounding. It highlights how someone would have initially thought about planting a tree, and how, for the same reason, someone else is sitting below it in the shade today.
This simply means that one should focus on and plan their investment journey meaningfully, with an eye to capturing the full potential of compounding. Furthermore, the earlier you start your investment journey, however small the initial investment may be, the longer your invested money will work for you and help you generate returns on both your original investment and the returns already earned.
Let us discuss this concept in detail with a few simple examples. Consider two investors who earn an average annual return of 12%. See how their corpus at 60 looks with just a decade of difference in investments.
Two cases of investments to clear the concept of ‘time in the market’ and its significance as discussed below briefly:
|
Investor |
Starting Age |
Monthly Investment |
Investment Period |
Total Investment Made |
Corpus at Age 60* |
|---|---|---|---|---|---|
| Investor A | 25 | ₹5,000 | 35 years | ₹21 lakh | ₹3.2 crore |
| Investor B | 35 | ₹5,000 | 25 years | ₹15 lakh | ₹94 lakh |
*Approximate values based on 12% annual returns.
Therefore, it is clear that, firstly, the difference in total initial investment is just about ₹6 lakh; yet, the overall corpus difference is extremely wide. It is essential to appreciate that ‘Investor A’ contributed only ₹6 lakh over the additional 10-year period. Still, he ended up building a corpus worth more than three times the value of ‘Investor B’. This is the power of compounding, and it happened because the initial investments of ‘Investor A’ enjoyed decades of compounding, resulting in exponential growth over time.
Investors still delay investments
Many aspiring investors still delay investing while waiting for a higher salary, an incentive, or to save more before making an initial investment. The unfortunate and hard truth in such cases is that the time lost cannot be recovered. Do remember that even doubling the investment amount later often makes it difficult to match the advantage of starting early.
This simply means that, for example, if you have a newborn child or are waiting to become a new parent, you should not wait for the day your child is born, but initiate an SIP, i.e., Systematic Investment Plan, in a growth based asset class, after proper due diligence and consultation with a certified financial advisor, so that your child enjoys the benefits of compounding when they grow into mature individuals decades later.
The lesson, therefore, is simple: successful investing is less about timing the market, buying stocks cheap or other similar tricks and more about time in the market.
It is also important to understand market cycles and acknowledge them, but investing as a concept should be based on discipline, devotion, clarity of vision and long-term economic objectives.
Start as early as possible; don’t aim to become rich first; don’t aim to start investing in mutual funds, stocks, bonds, etc., with a very large Systematic Investment Plan (SIP) contribution; stay consistent; and let compounding do the heavy lifting.