Inflation is glorified; delay is the silent threat to investing success

Many of them appear to be simply related to costs charged by financial product manufacturers and intermediaries. Some savvy investors add to the conversation to include the impact of taxes as well. Seasoned investors would factor inflation into the mix. Most investors spend a lifetime trying to optimize these costs, despite the fact that most of them are beyond their control.

However, there is a cost that lurks quietly in the shadows. Many have heard about it, most believe it exists, but it is rarely considered when planning personal finances. This is the cost of delay.

Taking a shortcut, let’s go back to the basic math we learned in school and turn to the chapter on compound interest. It is basically simple interest on your principal and then also the accrued interest, over and over again for the specified period. Think of it as a mathematical representation of the snowball effect.

Zoom in. Imagine that you are reading the formula of mutual interest. You will see that variables like the principal amount and the interest rate use the regular mathematical operations of multiplication and addition, but time is an exponential variable. This means that time, as a variable, has the most significant effect on the final size.

As a matter of serendipity, it is also the variable most investors have the most control over. At any given point in time, the amount invested lies within a certain range. Although an investor may try to achieve the maximum possible rate of return, the same is greatly influenced by external factors. Now, talking about time, an investor has relatively higher flexibility to ensure that the amount is invested for the longest possible period.

Here is a diagram that highlights the same. An important thing to note is that the diagram aims to highlight the impact of the investment period across different scenarios. All figures used are illustrative only.

For most of the general public, especially the salaried class, the assumption is that a person would secure a regular income from employment for at least 30 years. Considering the same cohort, many tend to invest towards longer-term goals like retirement for at least a few years or until short-term needs are provided for.

Now, although everyone’s personal financial situation is unique, the above illustration shows the direct and reduced impact of delayed investments or, in other words, investing for a shorter period of time on the final accumulated corpus. A 10-year delay could erode nearly three-quarters of the potential corpus. At the same time, an increase in the monthly investment three times is also not good enough to compensate for the lost time. The final amount would still be lower by a quarter.

Investors need to understand that the path to investment success is relatively simple. The mantra is to start as soon as possible, as long as possible, as long as possible. The best way to further improve the return is to increase investments as often as possible. This is a framework that provides a strong foundation. The final result of course depends on the minor differences such as asset allocation, product selection, investment strategy and the like.

For those who are well versed in the matters of time and money, the word ‘money is’ is not just a cliché but a fundamental truth.

Nirav Karkera is the head of research at Fisdom, a technology wealth platform.

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Updated: 08 November 2023, 11:02 PM IST