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Animated Chart: The Benefits of Investing Early in Life

by Carmen Ang
This post is by Carmen Ang from Visual Capitalist

The Benefits of Investing Early in Life

“Time in the market beats timing the market.”

This quote by Ken Fisher, founder of Fisher Investments, speaks to the often-overlooked benefits of long-term investing.

Timing the market for the perfect trade can be a tricky and potentially dangerous proposition—even for the most seasoned investors. That’s why the buy and hold strategy has been a popular investment tactic among many successful investors like Warren Buffett and Jack Bogle.

And thanks to the power of compound interest, it’s important to start as early as possible. This animated graphic by Sjoerd Tilmans shows the benefits of investing early on in life, and just how much of your total earnings can come from your early years.

Compound Interest

The reason that investing early is so beneficial is because of compound interest. Simply put, compound interest is the phenomenon of earning interest on interest.

For instance, let’s say you make an initial deposit of $1,000 in an account that returns 10% annually. By the end of the year, you’ll earn $100 in interest. In the following year, with your total now at $1,100 and assuming the same rate of return, you’ll earn $110 in interest.

And these annual gains, while starting off small, add up significantly over time.

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The Decline of Long-Term Investing

by Marcus Lu
This post is by Marcus Lu from Visual Capitalist

Decline of Long-term Investing

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The Briefing

  • The average holding period of shares on the New York Stock Exchange (NYSE) is now <1 year
  • Technological advancement is one of the biggest drivers of this change

The Decline of Long-Term Investing

“Our favorite holding period is forever.”

Those are words from famed investor Warren Buffett, an advocate of the buy and hold approach to investing. Buy and hold is a long-term strategy in which shares are gradually accumulated over time, regardless of short-term performance.

And while Buffett is undoubtedly a successful investor, data from the NYSE suggests that few are actually following his advice. As of June 2020, the average holding period of shares was just 5.5 months. That’s a massive decrease from the late 1950s peak of 8 years.

What’s Driving This Change?

The decline in holding periods appears to have been caused by a number of factors, with the most prominent one being technological advancement.

For example, in 1966, the NYSE switched to a fully automated trading system. This greatly increased the number of trades that could be processed each day and lowered the cost of transactions.

YearNYSE Average Daily Trading Volume* (number of shares)
18861M
1982100M
1987500M
20201,000M

*10 day moving average as of Dec. 15, 2020. Source: Nasdaq

Automated exchanges have led to the introduction of high-frequency trading (HFT), which uses computer algorithms to analyze markets and execute trades within seconds. HFT represents 50% of trading volume in U.S. equity markets, making it a significant contributor to the decline in holding periods.

Technology has enabled investors to become more active as well. Thanks to the internet and smartphones, new information is widely distributed and easy to access. With online trading platforms, investors also have the ability to act on this information immediately.

Social media is also playing a role. The recent r/wallstreetbets saga is an example of how the stock market can become sensational and fad-driven. After all, long-term investing has much less to offer in terms of excitement.

Corporate Longevity in Decline

Finally, companies themselves are also exhibiting shorter lifespans. This results in greater index turnover (companies being added or removed from stock indexes), and is likely a contributor to the decline in holding periods.

In 1970, companies that were included in the S&P 500 had an average tenure of 35 years. By 2018, average tenure was down to 20 years, and by 2030, it’s expected to fall below 15 years.

Altogether, these trends may be creating a greater incentive to pursue short-term results.

Where does this data come from?

Source: NYSE, Refinitiv (Accessed via Reuters)

The post The Decline of Long-Term Investing appeared first on Visual Capitalist.