by Keith Fitz-Gerald | March 22, 2012 12:19 pm
Most investors think of time as an enemy, a predator that stalks them all of their lives. They never feel they have enough of it, so they are constantly trying to outwit it.
Trying to beat time, they become irrational and make unpredictable, impulsive decisions to “get ahead” or hit the proverbial “home run.” Or, worse they pretend they have all the time in world and do nothing with it. Later they find themselves playing a costly game of catch-up they cannot possibly hope to win without taking huge risks. Unfortunately, that’s exactly where many investors find themselves today. They are sitting on the sidelines faced with the daunting task of making up the time they’ll never get back.
As a seasoned investor, I prefer to think of time as a constant companion — one that is willing to work with me every day if I harness it properly.
Rather than trying to cheat it, I work with it so that it tips the scales in my favor. This ensures that time becomes my ally rather than my enemy.
Let me illustrate. Which action do you think will earn you more money over the next 20 years?
Most people choose investing $24,000 in increments of $100 a month, and for one highly logical reason: you would be investing two-times more principal. The truth, though, is that putting away $12,000 right now is actually the more profitable choice. We have been conditioned to put a little away each month on the assumption that this will add up over time. But that’s only half the story. What investors really need to do is consciously put aside as much money as they can as soon as they can — then make sure it earns a decent rate of return for as long as possible.
There’s no hocus-pocus here.
It really is as simple as that, no matter what future market conditions may hold, no matter what happens with the elections, our debt, Europe, a hard landing in China, or even aliens landing. The single most important investment decision you can make today is to put time on your side.
Consider the following example.
At 5% a year, the person who chooses to invest $100 a month will be ahead of the lump sum investor 20 years out. But if both investors manage to obtain 10% per year over 20 years (high I know but hang with me for illustrative purposes) the tables turn and the lump sum investor ends up being 6.78% ahead over time.
At higher rates of return, the difference becomes even more pronounced.
At 20%, for example, the lump sum investor would have a healthy $460,051 versus the $268,830 the $100 a month investor would accumulate.
And just in case this is not setting off a huge obnoxious alarm bell in your head, let me put it another way with one of my favorite examples.
In 1626, we bought Manhattan Island from the Indians for a whopping $24 worth of beads and trinkets. History suggests the Indians got the short end of the deal. Factor in time and interest, and that’s not entirely the case.
If the Indians had invested that same amount at 7% a year, which is not unreasonable over long periods of time, they’d have $1,561,138,484,403.65 today which, incidentally, is not all that far off from the total estimated value of all the land in Manhattan.
The message here is clear: You don’t have to start with massive amounts of money to become wealthy. In fact, you can start with unbelievably small amounts. But you have got to start. You cannot worry about what might happen.
Don’t have 386 years to wait like the Indians did or think 7% a year compounded is impossibly high? No problem. How about if all you have is 12 years? Chances are good that if you’re reading this column, you’ve been investing for at least that long.
Had you put your money into Altria (NYSE:MO) on Dec. 31, 1999, your total return would be a healthy 1,011.07%. Divided by 12, that’s roughly 84.25% a year including dividends and reinvestment.
A similar investment with McDonald’s (NYSE:MCD) returned 215.71% over the same time period or roughly 17.97% a year, also including dividends and reinvestment.
The point is time matters and if you’re getting paid to play, it can be a powerful way to build true wealth.
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