The myth
Sometimes things happen, and you find yourself a little short on cash. While your emergency fund should cover your needs, you may be tempted to take some money from your investment instead.
After all, some people say that there won’t be any difference with the result (meaning, your earnings from the investment), as long as you put the same amount back when you can. But is this really true?
The reality
When you take money from your investment before you’ve reached your time horizon, you reduce its potential to earn for you. That could make it difficult for you to reach your goal on time.
Even if you put back the same amount later on, the returns probably won’t be the same. That’s because you would have missed out on the profit that the money didn’t earn in the period it wasn’t invested.
For example, imagine that you invested P20,000 in a Unit Investment Trust Fund (UITF) that has been growing 5% annually for the past 3 years. This means it rose by 15%, or P3,000. Assuming a steady growth rate, after a total of 5 years your investment would have increased by 25% (P5,000) to be worth P25,000.
But what happens if you withdrew P10,000 from the current value of P23,000? If you didn’t put the money back within the next two years, you would end up with P14,300 (10% growth of P13,000).
If you put the P10,000 back after 1 year, you would end up with P24,832.50. That’s the Year 4 value of P23,650 (P13,650 + P10,000), growing 5% by Year 5. This isn’t a huge difference, but remember that it would be bigger if the amount that you pulled out was greater.
Of course, this is just a simplified example, and in reality annual growth rates are rarely constant. Still, you can see that pulling money out early has an effect on your overall profit.
Verdict: False.
Taking money out early will probably negatively impact the returns you get from investing, and so you shouldn’t do if you can avoid it.
There are things you can do to lessen the effects, like putting the money back as soon as possible and staying invested for longer than you had originally planned. However, there is still no guarantee that you’ll be able to make up for the period in which the investment’s earning potential was lowered.
To increase your chances of having a fully rewarding investing experience, don’t take any money out before you reach your time horizon. Instead, add money to your investment regularly, and stay invested for as long as you can. Those are two ways for you to maximize the earning potential of your money.
Of course, this all applies for long-term investing. If you’re doing something like trading stocks on a daily basis, your approach will likely be very different, and taking money out often and putting it elsewhere could be an essential part of your strategy.
