12/04/06 - Keep Time On Your Side
By: Frank Armstrong, CFP, AIF
Time is such a valuable commodity, that it's a shame when investors squander it. Yet many investors blow it, wasting a resource that can't ever be recovered.
The Magic of Compound Interest
Time is an investor's most valuable ally. Returns increase exponentially over time, which is as close to magic as most of us will ever see. Putting time on your side is a key element to financial success.
To see just how valuable this element is, let's consider the case of a 20 year old wishing to retire at age 60 with $1,000,000. Assuming an 8% return, this future millionaire needs only to deposit $3,574 per year ($68 a week) to reach that goal. Over his/her 40 year career, he/she will only deposit $142,969, the balance of the million will come from earnings on the account.
Every day this investor waits to get started costs him/her in both annual deposits and total deposits over his/her career. The longer this investor waits, the more likely it becomes that he/she wont' reach the proposed goal.
|
Years to Retirement |
40 |
30 |
20 |
15 |
10 |
5 |
1 |
|
Monthly Deposit |
$297.83 |
$681.17 |
$1,686.17 |
$2,841.75 |
$5,623.33 |
$13,152.50 |
$77,160.50 |
|
Annual Deposit |
$3,574 |
$8,174 |
$20,234 |
$34,101 |
$63,916 |
$157,830 |
$925,926 |
|
Total Deposit |
$142,969 |
$245,206 |
$404,671 |
$511,521 |
$639,162 |
$789,150 |
$925,926 |
Time is a finite commodity for all of us. Once it's gone, it's gone. There is no getting it back. So, putting time on their side should be a top level concern for all investors. It's never too early to start a long term investment plan.
Investors that understand just how valuable time is, will want to keep time on their side. An avoidable investor mistake can fritter away years of savings and effort, placing you right back at the start point with little or no time to recover.
Avoiding these common mistakes to keep time working for you:
Raid the retirement account: A disappointingly huge percentage of workers fail to roll over their pension and profit sharing accounts when changing jobs. The funds are used for everything from vacations to new cars. It's especially important to keep all your retirement accounts at work. While the amounts may seem relatively small, left to accumulate tax deferred in an IRA they will grow to substantial amounts. For instance, $10,000 left to grow at 8% for 30 years will be worth $100,626 when it's needed for retirement.
Take a flier: Some delusional investors rationalize that a series of high risk investments will average out over time, and that a loss today can be made up by tomorrow's gains. These serial losers buy into one deal after another that sounds too good to be true, hoping for a huge payoff. This gambler's mentality has almost nothing to do with investing, and rarely leads to anything but financial ruin.
Concentrated Investments: Anything less than a fully diversified portfolio magnifies risk without increasing expected return. No investor should ever bear a risk that could be diversified away. They can't afford for all or a large portion of their savings to vaporize. The more concentrated a portfolio, the more opportunity for something awful to happen. Just ask any Enron employee how he likes his company stock now. Avoid sector funds, individual stock holdings, and funds with concentrated positions.
Keeping your funds in play with reasonable investment strategies and constant discipline is just as important as starting early. Blowing your nest egg up along the way destroys your most valuable alley in the quest for financial independence.
Back To Top
Enjoy this post? Share it with others.
