Investor Education

Animated Chart: The Benefits of Investing Early in Life

Published

1 month ago

February 15, 2023

Sjoerd Tilmans

Featured Creator

Article/Editing:

Carmen Ang

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.

What If I Double Down When I Have More Money?

What happens when you wait to invest?

Though you should only invest money that you don’t need access to in the short term, the reality is that waiting will have consequences on your long-term gains.

For example, let’s say you started investing at 20 years old, and you invest $250 each month with an 8% annual rate of return. By the time you reach 65, over 50% of your total portfolio would have come from money that you invested in your 20s.

Someone who invests a decade later than their peer with double the amount will see actually see lower returns in the long run. For a more thorough breakdown, check out this infographic that goes into detail about the power of compound interest.

Long-Term Investing is Declining

Despite the benefits of long-term investing, it seems that many investors these days are opting for shorter holding periods and quick gains over long-term growth.

For instance, according to the NYSE, the average holding period for stocks in the late 1950s was 8 years. By June 2020, the average holding period had dropped to 5.5 months.

That being said, recent interest rate hikes and threats of a recession could lead to a major slowdown. While quick-win investing has been trending in recent years, we may very well see long-term investment strategies regain some footing.

This article was published as a part of Visual Capitalist's Creator Program, which features data-driven visuals from some of our favorite Creators around the world.

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Investor Education

Countries with the Highest Default Risk in 2022

In this infographic, we examine new data that ranks the top 25 countries by their default risk.

Published

8 months ago

July 13, 2022

Marcus Lu

Countries with the Highest Default Risk in 2022

In May 2022, the South Asian nation of Sri Lanka defaulted on its debt for the first time. The country’s government was given a 30-day grace period to cover $78 million in unpaid interest, but ultimately failed to pay.

Not only does this impact Sri Lanka’s economic future, but it also raises an important question: which other countries are at risk of default?

To find out, we’ve used data from Bloomberg to rank the countries with the highest default risk.

The Sovereign Debt Vulnerability Ranking

Bloomberg’s Sovereign Debt Vulnerability Ranking is a composite measure of a country’s default risk. It’s based on four underlying metrics:

Government bond yields (the weighted-average yield of the country’s dollar bonds)
5-year credit default swap (CDS) spread
Interest expense as a percentage of GDP
Government debt as a percentage of GDP

To better understand this ranking, let’s focus on Ukraine and El Salvador as examples.

Country	Rank	Government Bond Yield (%)	5Y CDS Spread	Interest Expense (% of GDP)	Government Debt (% of GDP)
🇸🇻 El Salvador	1	31.8%	3,376 bps (33.76%)	4.9%	82.6%
🇺🇦 Ukraine	8	60.4%	10,856 bps (100.85%)	2.9%	49%

1 basis point (bps) = 0.01%

Why are Ukraine’s Bond Yields so High?

Ukraine has high default risk due to its ongoing conflict with Russia. To understand why, consider a scenario where Russia was to assume control of the country. If this happened, it’s possible that Ukraine’s existing debt obligations will never be repaid.

That scenario has prompted a sell-off of Ukrainian government bonds, pushing their value down to nearly 30 cents on the dollar. This means that a bond with face value of $100 could be purchased for $30.

Because yields move in the opposite direction of price, the average yield on these bonds has climbed to a very high 60.4%. As a point of comparison, the yield on a U.S. 10-year government bond is currently 2.9%.

What is a CDS Spread?

Credit default swaps (CDS) are a type of derivative (financial contract) that provides a lender with insurance in the event of a default. The seller of the CDS represents a third party between the lender (investors) and borrower (in this case, governments).

In exchange for receiving coverage, the buyer of a CDS pays a fee known as the spread, which is expressed in basis points (bps). If a CDS has a spread of 300 bps (3%), this means that to insure $100 in debt, the investor must pay $3 per year.

Applying this to Ukraine’s 5-year CDS spread of 10,856 bps (108.56%), an investor would need to pay $108.56 each year to insure $100 in debt. This suggests that the market has very little faith in Ukraine’s ability to avoid default.

Why is El Salvador Ranked Higher?

Despite having lower values in the two metrics discussed above, El Salvador ranks higher than Ukraine because of its larger interest expense and total government debt.

According to the data above, El Salvador has annual interest payments equal to 4.9% of its GDP, which is relatively high. Comparing to the U.S. once more, America’s federal interest costs amounted to 1.6% of GDP in 2020.

When totaled, El Salvador’s outstanding debts are equal to 82.6% of GDP. This is considered high by historical standards, but today it’s actually quite normal.

The next date to watch will be January 2023, as this is when the country’s $800 million sovereign bond reaches maturity. Recent research suggests that if El Salvador were to default, it would experience significant, yet temporary, negative effects.

Another Hot Topic for El Salvador: Bitcoin

In September 2021, El Salvador became the first country in the world to adopt bitcoin as legal tender. This means that Bitcoin is recognized by law as a means to settle debts and other obligations.

The International Monetary Fund (IMF) criticized this decision in early 2022, urging the country to revoke legal tender status. In hindsight, these warnings were wise, as Bitcoin’s value has fallen by 56% year-to-date.

While this isn’t directly related to El Salvador’s default risk, it does open potential avenues for relief. For instance, large players in the crypto space may be willing to assist the government to keep the concept of “nation-state bitcoin adoption” alive.