When people hear that investing is for the long term, they may think that they don’t have enough time to do it, or that it takes years and years to generate a return.
But that’s not entirely true. Yes, it requires some commitment to start investing, but returns can happen a lot sooner than you may think.
What is a return on investment?
Before getting into how soon you can expect a return, let’s look at what a return on investment actually is. In a nutshell, return on investment (or ROI) is a measurement used to see how efficiently an investment performs.
You can then use this measurement to compare different investments and find your best and worst performers. You’ll find that ROI can either be shown as a percentage or a ratio, but it is always calculated by subtracting the current price of your investment by the initial amount you paid for it, then dividing this new number (which is your net return) by the cost of the investment, then finally, multiplying it by 100.
So, if you have investments currently worth £150 and you originally paid £80 for them, then your net return is £70, making your ROI 87.50%. Make sense?
How soon can you expect a return on investment?
Now that we know what a return is and how to calculate it, how soon can you expect to see a return? The answer to this depends on a huge range of different factors. Everything from what you’re invested in, when you invested, what the market is doing, and how much you invested impacts this.
Theoretically, it’s possible to have an immediate return on investment. If you buy when the price is low and then sell at a higher price, covering both the price you paid and any transaction or investments fees.
But if you manage to do this, then you could make a positive return within a single day. This type of fast-paced trading is one of the many differences between Day Trading and investing. And while this may sound great in theory, the reality is that it isn’t always this simple.
Profits from your investments
Another thing to consider is whether you have any investments that pay dividends or interest. Dividends are when a company pays its stockholders, either in cash or additional stock, out of their earnings. It is essentially a ‘thank you’ from the company for owning their shares.
Interest is when you receive a payment as a percentage of the amount that you lent to a government or company in the form of bonds. Not every company pays dividends and those that do, don’t pay them at the same rate or on the same time scale either. Some companies choose to pay dividends quarterly, others twice a year and some annually.
It’s also worth noting that there is no legal obligation for a company to pay dividends.
However, the issuer of a bond is obliged to pay interest which could be paid at any time scale from monthly to yearly.
If you have invested in a way that provides dividend or interest payments, then you may have the opportunity to see a return on your investment within a quarter or even a month. That is, of course, provided that you’ve held your investments for any required timescales.
What you do with these payments could have an impact on your long-term return. You see, if you take your payments out as cash then, yes, you may have made some returns now, but if you’d re-invested that money, then those additional investments could have returned their own profits.
This amount could then snowball, and after investing for a few years, your returns could potentially be even greater – this bit of mathmagic is called compounding.
Individual investment growth
As mentioned above, not all investments pay dividends or interest. So how do you make a return on your investment here? This relies on the price of that individual investment going up. And while, yes, this can happen overnight, you are more likely to get a return on your investment over a longer period. For example, if you invested in the FTSE 100 for any 10-year period between 1986 and 2022, you would have had an 88% chance of making a positive return.[1]
While you could put all your money on one horse, a safer (and more sensible) approach could be to use a technique called diversification.
The concept is that instead of putting all your eggs in one basket, you spread it out over a number of different investment types and locations all around the world.
That way, if one investment performs poorly, it could be balanced out by another performing well. To make a return on your investment with this approach, you simply need the price of your investment to exceed the cost that you paid for them, plus the price of any fees.
The more the value of that investment grows, the greater your potential return, but if the value shrinks then your return will be less.
How long this takes will depend on a multitude of factors, it could take a few days, weeks, months, or years, or it may never happen at all. With investing, nothing is ever certain, which is why it is important to try and reduce your risk and thoroughly research your investments.
The Rule of 72
If you are happy to wait while your investments mature, and you’re planning on re-investing any profits to benefit from compounding, then you could use the Rule of 72 to estimate how quickly it will take for your investment to double in size.
But what is the Rule of 72? Essentially, this rule gives an estimate of how long it may take to double your money by dividing 72 by your rate of return.
So, in practice, if you invest with a 10% return, you would double your money every 7.2 years, as 72 divided by 10 is 7.2. Think you’re more likely to see a 5% return? Using the Rule of 72, you may double your money in 14.4 years.
But what’s realistic here? Well, from its inception in 1984 up until 2022, the FTSE 100 provided an average annual total return of 7.99%.[2]
And while not every year provided this return, if you took this average return and applied the Rule of 72, you may have doubled your money every 9.01 years.
It’s important to remember that while this may be called a ‘rule’, it only provides an estimate. Your returns may change, how much you receive in dividends and interest may also differ, and you may also need to pay tax, for example, if you aren’t investing in a Stocks and Shares ISA.
The conclusion?
How long it takes to make a return on your investment relies on too many factors to be able to predict with any degree of accuracy. While there is a lot of research and figures to show that long-term investing could provide you with greater potential, it could also be possible to make returns much more quickly if everything falls into place.
If you’re thinking about investing and want to benefit from a team of expert investors who carefully research, manage, and balance your investment plans, then Wealthify could help.
You can get started with as much as you like, and our team will always build you a carefully diversified plan in an investment style that best suits your needs.
References:
- https://www.ig.com/uk/trading-strategies/what-are-the-average-returns-of-the-ftse-100--230511
- Data from Bloomberg, from 1984-2019 re-investing gross dividends
Please remember that past performance is not a reliable indicator of your future results.
With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.
