At first glance, the similarities between steadily investing for retirement and launching the latest hot Silicon Valley startup may seem few. But if you look closer, parallels exist that can shape your investment strategy, whether you’re in it for the long or short term.
Big things start small
You may have heard tales of bootstrapping startups launching from their parents’ garage or a friend’s living room. If you’re just beginning to invest in your company’s retirement plan, you may be starting from a similar point.
Unlike the budding businessperson, you could have compounding interest on your side.
Take, for example, investing an initial $1,000 in a fund that, over time, earns the historical U.S. market average return of about 7% (which accounts for inflation). The first year, you could earn $70 ($1,000 * 1.07). If that $70 remains in your investment portfolio, in year two you could earn almost $75 ($1,070*1.07). And so on. In just over 10 years, you could double your investment without adding any additional funds.
While you won’t always earn 7% each year – some years more, some years far less – this example highlights how invested money can build upon itself. This has significant impact over your lifetime, once you account for 20 to 30 years of compounding.
Your risk should match your goals
There are different kinds of entrepreneurs in the world: Those who seek to disrupt industries and those who see value in a smaller business. The risk varies based on the returns an entrepreneur expects.
The same goes for your investments. When investing for short-term goals, you should consider different risks than for long-term plans. For short-term strategies — say, saving for a vacation or a down payment on a home — you may not want to invest in a riskier portfolio that includes stocks. Your money may not have time to compound, and you could risk a slide in the market that could leave you with less than what you started with.
Instead, taking $100 from your paycheck every month and placing it into an easy-to-access savings account could help you attain your shorter-term goal.
For retirement purposes, investing in a company plan that includes stocks could add a little more risk to your portfolio. That may be okay, because these funds shouldn’t be touched for years. That could reduce the overall risk of the investment, which we explain next.
Expect some ups-and-downs
For an entrepreneur, the wave of uncertainty only invigorates them. When investing for long-term goals, you should also expect some ups and downs in your portfolio.
While historically the stock market returns around 7 %, in any given year it can fall 8%, 10%, 20% or worse. But keeping up the strategy of buying into your company plan each month gives you a chance to potentially benefit from those drops.
Here’s an example: Say you invest $100 a month to buy a fund that’s typically $10 a share (buying shares of a company’s stock gives an investor part ownership of that company; buying shares in a fund allows for diversification, because the fund will typically hold a variety of stocks). You now have 10 shares. But let’s say the market drops, sending the cost of the fund down to $8. If you keep buying the $100 worth of shares, you now have 12.5 shares that month. So while your fund lost 20% for the short term, you’ve gained more shares, which could benefit you if the market corrects itself.
Entrepreneurs fail often, long-term investors don’t
While we glorify entrepreneurs who have made it big, in fact 8 out of 10 fail within the first year and a half. It’s a risky proposition to start your own business.
But for long-term investors saving for retirement, the risk isn’t nearly as strong. Assuming you believe the American economy will continue to grow, the chances of investing over 30 years and losing money is much less likely with the right diversified investment plan.
What you can do next
Risk is a fact of life for investors and entrepreneurs alike. If you understand (and act on) risk's relationship with reward—and use time to your investing advantage—you'll really be in business!
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The compounding concept is hypothetical and for illustrative purposes only and is not intended to represent performance of any specific investment, which may fluctuate. This example is based on a hypothetical rate of return of [x%] compounded [monthly/annually]. No taxes are considered in the calculations; generally withdrawals are taxable at ordinary rates. It is possible to lose money by investing in securities.