What You'll Learn in This Episode
– When is the absolute best time to start investing for retirement?
– Am I already too late?
In today’s episode, we’re cutting through the noise. We’ll discuss why time is your greatest asset, why market timing is a dangerous myth, and how the combination of time and quality is the only real secret to a portfolio that pays for life.
Whether you’re 25 or 55, this is your roadmap to building a growing stream of reliable dividend income.
Complete Transcript
I’m Kanwal Sarai, and welcome to the Simply Investing Dividend Podcast. Some of the most common questions I get asked are, when is the absolute best time to start investing for retirement? And am I already too late? In today’s episode, we’re cutting through the noise. We’ll discuss why time is your greatest asset, why market timing is a dangerous myth, and how the combination of time and quality is the only real secret to a portfolio that pays you for life. Whether you’re 25 or 55, this is your roadmap to building a growing stream of reliable dividend income. Let’s get started. In today’s episode, we’re going to cover the following five topics. When is the best time to start investing for retirement? Topic number two, time is on your side. Next, we’ll take a look at investing for retirement. Then we’ll take a look at market timing is actually a myth, and I’ll show you why.
(01:10):
Then we’re going to take a look at time and quality. Let’s get started with our first topic. When is the best time to start investing? Am I already too late? And should I wait for the market to drop? Well, the best time to start investing was 20 years ago. The second best time is today. Remember, this is a long-term approach. We are investing for the long-term for the next 10, 15, 20, 30 years. So this is not an approach where you can double your money in 60 days or in three months. This is a long-term approach to building your portfolio slow and steady, safely, and to generate a growing stream of dividend income that you could live off of. Now, waiting on the sidelines will cost you money. So remember, time is on your side, and we’re going to cover that right now in topic number two.
(02:19):
The importance of starting early. I can’t emphasize that enough. That is very, very important. So I’m going to give you an example. We’re going to look at two investors and we’ll take a look at why starting early is really important. So we’re going to have Earl, who is the early starter. He’s going to start investing at the age of 25. He’s going to invest $615 a month for the next 21 years. And so you can see up on that screen, if we take 615, multiply by 12, that is $7,380 a year that he’s going to invest towards his retirement. And you can see the total amount of money he’s going to invest is $154,980 over the next 21 years. Peter, on the other hand, we’ll call him, he’s our procrastinator. Peter is only going to start investing at the age of 35. So he’s going to start 10 years later, but you can see the numbers on the screen.
(03:20):
He’s investing the same amount of money. And he’s also investing for 21 years. So the total amount invested with both Earl and Peter is exactly the same, but Peter is going to start 35 years later. So if anybody is interested, this is what the spreadsheet looks like. I’m going to put a link to this. This is my future value spreadsheet. It’s a Google sheet. It’s free to download. I highly recommend you download it. Try it out, put your own numbers in there and see what the future value of your investments could look like. So here we can see with Earl, he’s starting at the age of 25. In the first year, he’s investing $7,380, and he does that every single year. And of course, he’s reinvesting his dividends. And by the age of 45, he’s going to make his final investment of $7,380, and then he’s going to stop.
(04:17):
But keep reinvesting the dividends. And you can see the total amount invested, as I showed you before, is $154,980. Now, Peter is also investing the same amount of money, but he’s starting 10 years later at the age of 35. So you can see that up on the screen. The first 10 years, the amount invested at zero, but at the age of 35, he’s going to put that money in. He’s investing the same amount of money as Earl. Now, let’s take a look at what that looks like over a long period of time. And I’m going to make an assumption here. I’m using the average rate of 8%. Again, feel free to download the future value Google sheet. You can enter in your own annual rate of return. So I’m going to go with 8%. That includes dividend increases and increases in the stock price. So again, Earl and Peter are investing the same amount.
(05:16):
You can see it up on the screen. The annual dividend income at the age of 55, Earl will be earning over $28,000 a year in annual dividend income. And hopefully that’ll go up every single year as the companies he’s investing increase their dividends over time. Peter, on the other hand, because he waited 10 years to start investing, his portfolio at the age of 55, that year will generate only $13,000 a year in dividends. So you can see that is a staggering difference here in just the dividend income alone. And now if we take a look at the value of the portfolio at age 55, Earl’s portfolio is going to be worth over $867,000. Peter’s portfolio is going to be worth a little over $401,000. Now that is a difference of $465,762. So almost half a million dollars, right? That is how much money, in theory, Peter has lost because he waited 10 years to start investing.
(06:33):
So I hope that this example shows you the power of investing sooner than later. In this case, both of them are investing the same amount of money, but Peter, his portfolio is going to be almost half a million dollars less, right? $465,000 less than what Earl has when they both turn 55. So it’s important to start sooner than later. Now, let’s talk about investing for retirement and let’s see what that looks like. Now, when I say retirement doesn’t have to be 65 or 75. Some people have achieved retirement at 45 or at 40. So it all depends on how you invest and when you start. So the goal here is to reach your crossover point as soon as possible. Now, if you haven’t watched it, I recommend you go back and watch episode 123, where I cover the crossover point in detail. Now, I’m going to go over it quickly in the next couple of slides here, but if you want more information, I have an entire episode dedicated to that.
(07:44):
So the crossover point is equal to the financial independence. That’s when you achieve financial independence. And you do that by reaching the crossover point where your passive income is greater than or equal to your living expenses. So this is what it looks like on a graph. You can see your expenses over time. Your expenses will grow. Eventually they kind of level off, but that’s what it looks like. And your passive income, in our case, it’s going to be your dividend income that your portfolio is generating. Again, it’s going to start off slow. As you reinvest those dividends, as you reinvest more money, your passive income is going to start to grow. Eventually, we want to see the passive income exceed your expenses. And where do those two lines intersect, and you can see it up on the screen, that is the crossover point. So remember, the crossover point means you’ve achieved financial independence.
(08:44):
Now, you can still choose to work if you want to, but work then becomes optional because all of your living expenses are now covered by your dividend income. So how do you reach the crossover point sooner than later? Because that’s what everybody wants. People don’t want to wait till they’re 85, 75, or 65 to retire. They want to be able to do it sooner. So there’s two ways to do that. Number one, well, you have to do both of the ways. So one is to lower your fees, and this is if you’re investing in mutual funds, index funds, or ETFs. And that’s a big one, because you can’t retire sooner if you’re paying a lot of money in fees. That’s the management expense ratio, the management fee on those funds. And secondly, we want to build a resilient portfolio that generates growing income each year.
(09:37):
And we want to do that in the right way so that your portfolio is growing and your dividend income is going up as well. So let’s take a look at the lowering your fees. Again, I have an entire episode dedicated to this. So if you’re interested, you can go back and watch episode 38. Now, so the true cost of the fees for your mutual funds, index funds, ETFs is going to depend on a number of things. The amount of money you invest initially, your continued contributions every month, every week or every year, the rate of return, and of course, time, how long you stay invested in those types of funds. I’m going to use a really simple example. We’re going to keep the numbers simple. Again, you can change these numbers if you want. There’s a lot of online calculators that show you how much you’re paying when it comes to those management expense fees.
(10:35):
In this example, we’re going to look at someone who’s got $500,000. This is across their 401k or in Canada you’ve got the RSP or a TFSA across all your accounts. Let’s say you’ve got $500,000 invested. You continue to contribute another 500 a month until you retire. Average rate of return is going to be 8.5%, and we’re going to look at two time periods, 25 years and 45 years from now. So the good news is that it doesn’t matter which mutual fund index run or ETF you’re in, assuming they’re all sort of global SNMP 500 kind of type of funds. The good news is even if the fees are high or low, you’re going to make money as long as you’re in sort of a broad market based index. So I’ve given a couple examples on the screen here, right? So in the first one, you can see the annual management fee is 2%.
(11:34):
And then we got another example with 1% and then 0.5 and then 0.05. So of course, the lower the fee, the more money you’re going to be able to keep. So if we take a look at $500,000 with a very low cost ETF where the fee is 0.05%, you can see that after 25 years, your investment should be worth around $4.3 million. After 45 years, it should be worth around $22 million. Now this is an approximation. Again, we’re using a lot of assumptions here, but your investment should grow if it’s in a typical broad market based index fund. So in this example, it could be an SN&P 500 index fund. Now, the bad news is that each of those funds are going to cost you in fees. And so again, all the numbers are up on the screen. We’re only going to focus on the last one where the MER is 0.05%.
(12:37):
So if you’ve got $500,000 invested there, after 25 years, you’re going to pay a little over $48,000 in fees. After 45 years, you’re looking at almost $450,000 will be lost to fees. So my philosophy is you need to stop paying those fees. And of course you can see, if you can go back to the video, if the MER is higher, the fees are going to be much higher. So those are going to hold you back and prevent you from retiring sooner than later. You’re going to have to work many, many more years to compensate for the money that you’ve paid in those fees. So the goal here is to stop paying fees altogether or at least minimize those fees. So now let’s take a look at number two. So how do we build a resilient portfolio that’s going to generate growing income for you year after year after year, regardless of what happens in the stock market.
(13:39):
That’s why it’s a resilient portfolio. So for this, I’ve created what I call the 12 rules of simply investing, and the rules are designed to lower your risk, save you time, and help you earn more. And you can see them up on the screen right now. We’ve got 12 rules here. And the way it works is before you invest in any company in any stock, a dividend stock, we want to make sure that it passes all of the 12 rules. If there’s even one failure, skip it, move on to something else. Now, we cover these in detail and simply investing course. For now, I’m just going to go through them one by one. Rule number one, do you understand how the company is making money? If not, skip it, move on to something else. Rule number two, 20 years from now, will people still need its product and services?
(14:25):
Rule number three, does the company have a low cost competitive advantage? Rule number four, is it recession proof? Rule number five, is the company profitable? Rule number six, does the company grow its dividend? Rule number seven, can the company afford to pay the dividend? Rule number eight is the debt less than 70%. Rule number nine, avoid any company with recent dividend cuts. Rule number 10, does it buy back its own shares? Rule number 11, is the stock priced low? Is it undervalued? We want to buy stocks when they’re undervalued, not when they’re overvalued, right? So that’s really important. And rule number 12, keep your emotions out of investing. So now let’s take a quick look. An example of one company, and I’m going to pick a pharmaceutical company. It’s a US company founded in 1876, and it is a dividend stock. So you can see the company name here.
(15:20):
It’s Lilly. The stock symbol is LLY. And we’re going to assume that you invested $10,000 in this company back in 2011. So about 15 years ago, you invested $10,000 in a dividend stock. And I just picked this as an example. There’s hundreds, thousands of dividend companies out there. This is just an example to show the power of the dividends coming in, the dividends growing every year, and we want to see what that looks like just as a typical example of a dividend stock. So let’s take a look here. Let’s say you invested $10,000 back in 2011. Today, as of this recording, you would have received a total of over $14,700 in dividends. So the dividends are coming to you every quarterly, and let’s say you just collected them, and that’s how much cash you would have today. And so that’s pretty remarkable, because that now covers your capital cost, your $10,000, you’ve already made your money back, right?
(16:29):
So whether the stock goes down next month or next year or next week, you’re okay. You’ve already made your money back. Everything from here on out is going to be pure profit, right? And so you can see here the value today, including dividends. Now the dividends have gone up every year, and the stock price has gone up as well since 2011. And you can see that this $10,000 investment today, if you just held onto it, didn’t sell any shares, just held onto it, would be worth over $286,000. So that’s a fantastic rate of return. That’s a little over 2,700% return in 15 years. If you want to watch and see other examples of dividend stocks with extraordinary returns, I recommend you go back and watch episode seven. Okay. So the other thing here is as of this recording, and given today’s dividend that the company Lilly is providing, and if you still held onto those shares that you bought back in 2011, this year you would receive $1,806 in dividends.
(17:44):
And hopefully next year it’ll go up if the company increases the dividend, and the year after that, it should go up again if the company increases the dividend. So that’s a dividend yield on cost of 18%. So in this example, you’re making an 18% return on your initial investment just for holding onto those shares. And remember, we talked about the crossover point, right? You want to get there sooner than later. And the way we’re going to get there is by building a portfolio that pays us more and more dividends every single year. That way, we can eventually live off of the dividends without having to sell a single share. And so stock pricing can go up and down all the time. Even in this example with Lilly, the stock price can go up and down as long as the company is paying a dividend. In this example, this investor is now making an 18% return every year.
(18:40):
And like I said, it should go up again next year if the company increases the dividend. And so that is a pretty good return. The company has, in fact, had 12 years of consecutive dividend increases. So now you might be thinking, “Well, I’m ready to start investing, but shouldn’t I wait for a market crash to start investing, wait till everything is undervalued and really priced low and get a lot of stocks really cheap?” Well, let’s take a look at that. So that’s what you’re talking about there is market timing. And I would argue that market timing is a myth, right? If we’re looking at the last 45 years of the stock market, so we’re going to look at the Dow Jones Industrial Index, you can see that the stock market goes up and down, up and down. There’s a lot of ups and downs, and it is impossible to predict what is going to happen next week, next month, or next year, or even tomorrow.
(19:40):
And the good thing is over the long term, if you look at over the last 40 years, and you can see the graph up on the screen, the graph is doing this, right? The trend is that it’s going up, and so that’s good. That’s what we want to see, is the long term trend is that the market is going up, but there are going to be lots of ups and downs, and you can see those there. And it’s impossible for any one of us to predict where the stock market is going to go. So waiting for a recession to start investing often leads to missing out on years of dividends, right? Are you going to wait on the sidelines for six months, maybe a year, maybe two years, waiting for the perfect time? Well, then you’re going to miss out on all those years of dividends.
(20:25):
And what we do is we take those dividends, especially in the early stages of investing, is we take those dividends and we reinvest them back into other stocks that pay us dividends. And so that’s a way to compound your growth. And so if you wait on the sidelines, you’re going to miss out. And remember rule number 11, where we were looking for stocks that are priced low, undervalued. So even when the market is high, there are always quality stocks that are undervalued, right? I’m going to share a quote from Geraldine Waste. Somebody had asked her, she was a legendary dividend investor, and someone asked her, when is the best time to invest? And she said, “It’s always a good time to invest in quality dividend stocks that are undervalued.” Okay, so that takes a lot of pressure off of you. You don’t need to try and predict where the stock market is going to go, and we don’t predict where the stock market’s going to go.
(21:22):
We look at today, I have some money to invest, what are quality dividend stocks out there, and which one of those are priced low. So to help you with that, we have our simply investing web application or our platform. You can see a screenshot here, and the platform’s going to tell you immediately which stock is undervalued and which stock is overvalued. And we automatically track over 6,000 companies in the US and in Canada, and we tell you immediately which ones are undervalued or valued. We even go a step further and you can see in that screenshot, we have a column called the simply investing criteria out of 10. So those are the simply investing rules, four to 11. The platform automatically applies those rules, the SI criteria to over 6,000 stocks in the US and Canada. So this is going to save you a lot of time and from spending hours and hours on doing research, and it makes it quite easy to identify stocks when they’re priced low.
(22:26):
So now I want to leave you with three pieces of wisdom, and it has to do with time and quality. So number one, time is your greatest asset, and we saw that at the beginning of the episode with the example of Earl and Peter, right? So time is your greatest asset, but quality is your greatest protection against market downturns, against dividend cuts, and against buying stocks that are lousy investments, right? So quality, you’re going to get that by following the 12 rules of simply investing. So I’m going to repeat this one again. This is very important. Time is your greatest asset, so you want to start early, but quality is going to be your greatest protection against market downturns. Number two, don’t wait for the perfect time to start investing. You can start today. Number three, make today the time you start your journey to living off of dividends forever eventually.
(23:30):
So use the simply investing approach to help you become a confident investor and retire early. So how do we do that? We invest in quality dividend paying stocks when they are priced low. This is going to help you build a resilient portfolio that’s going to provide you with growing income each year, regardless of what happens in the stock market. So how do we do that? We use the 12 rules of simply investing. And so we covered these already, right? We covered what the rules are for. They’re designed to lower your risk, save you time, and help you earn more. So you can see the rules again here up on the screen. I’m not going to go through them again. We covered them in this episode today. So we have an all- in-one solution where we provide you with the simply investing web application, that’s our platform, and it includes access to our simply investing dividend course.
(24:25):
The web application, you can see it right here. Same screenshot I showed you before. We track over 6,000 companies in the US and Canada every single day, and we apply the simply investing criteria to all of them. The simply investing course in module one, we’re going to cover the investing basics. It’s an online course. There’s videos that you can watch. Self-paced, module two, we cover the 12 rules of simply investing in detail. Module three, you learn how to apply those 12 rules to any stock anywhere in the world. Module four, we show you how to use the Simply Investing platform. Module five, how to place your first stock order step by step. Module six, how to build and track your portfolio, module seven, when to sell, which is just as important as to know when to buy. Module eight, how to reduce your fees and risk, especially when it comes to mutual funds, index funds, and ETFs, module nine, your action plan to get started, and module 10, I answer your most frequently asked questions.
(25:27):
If you’re interested, you may want to write down our coupon code, save 10, SAVE10. It’s going to save you 10% off of our all- in-one solution, whether it’s a monthly subscription or the annual subscription, and the coupon code stays there for life. As long as you are an active subscriber, you will save 10% on every renewal. If you enjoy today’s episode, be sure to hit the subscribe button, hit the like button as well, and for more information, take a look at our website, simplyinvesting.com. Thanks for watching.
