Importance Of investment horizon.
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Importance of investment horizon
Investment horizon is another important aspect which influences returns. They are directly related i.e. longer the investment horizon the better the returns. The reasons for this are two-fold – Rupee Cost Averaging and the Power of Compounding.
Rupee Cost Averaging (RCA)
RCA involves investing a set amount of money at regular intervals over a long period of time. This not only takes the guess work out of ‘timing’ the market but you automatically buy more units when prices are lower and fewer units when prices are higher. Thus, over time you pay lower average cost per unit.
Power of Compounding
Compounding is a simple concept that offers astounding returns: if you park your money in an investment with a given return, and then reinvest those earnings as you receive them, your investment grows exponentially over time. With simple interest, you earn interest only on the principal (that is, the amount you initially invested); with compounding, you earn interest on the principal and additionally earn interest on the interest. In other words, it’s a way of making your money work harder for you, and is perhaps the most powerful tool that an average investor can use to plan for many of life’s financial goals, including retirement.
The illustration below gives an indication of the importance of disciplined investing and returns generated over the investment horizon.
Investment horizon is another important aspect which influences returns. They are directly related i.e. longer the investment horizon the better the returns. The reasons for this are two-fold – Rupee Cost Averaging and the Power of Compounding.
Rupee Cost Averaging (RCA)
RCA involves investing a set amount of money at regular intervals over a long period of time. This not only takes the guess work out of ‘timing’ the market but you automatically buy more units when prices are lower and fewer units when prices are higher. Thus, over time you pay lower average cost per unit.
Power of Compounding
Compounding is a simple concept that offers astounding returns: if you park your money in an investment with a given return, and then reinvest those earnings as you receive them, your investment grows exponentially over time. With simple interest, you earn interest only on the principal (that is, the amount you initially invested); with compounding, you earn interest on the principal and additionally earn interest on the interest. In other words, it’s a way of making your money work harder for you, and is perhaps the most powerful tool that an average investor can use to plan for many of life’s financial goals, including retirement.
The illustration below gives an indication of the importance of disciplined investing and returns generated over the investment horizon.
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