Monday, March 23, 2015

It’s about time you started saving

The first Monday morning after we adjusted our clocks for Daylight Savings Time, the topic of time sort of took over the news. Later that day, Apple unveiled the much-anticipated Apple watch. It sounds like the new watch will be able to perform an incredible number of functions, in addition to keeping the time of day, of course.

Also that Monday, although there was never a formal bell to signal a bull market, investment experts agreed that the current bull market started its run precisely six years prior.

In other words, while all of us leaped forward an hour and adjusted to daylight savings time, the most famous tech company in the world unveiled what they believe will be revolutionary changes to the wrist watch. Concurrently, many investment experts, while establishing a beginning for the bull market, continue to debate just how long it can continue without a major correction.

That’s the thing about time: when it is gone, it is gone. You can’t roll back the hands of time, nor can you control it. Fortunately, you can manage it.

One thing that investors, especially young ones, need to learn is how to turn time into an ally. Let’s take a look at an example involving two investors, each earning a hypothetical 10 percent per year.

At the age of 20, Ms. A began saving $2,000 per year every year for 20 years. At that point, after investing a total of $40,000, she totally stopped investing for the next 20 years. That is to say, she let time take over for the final 20 years.

Meanwhile, Mr. B played hard for the first 20 years and saved nothing. Then he suddenly became serious and invested $2,000 per year for the next 20 years; also a total investment of $40,000. Now, both are age 60 and want to accept an early retirement offer from their employer.

On the surface, you might think they’ll both have the same amount of money. After all, they both invested exactly $40,000 for exactly 20 years. Of course, that’s not the case.

Ms. A used time as an ally and benefitted from the magic of compound interest. By starting early and taking advantage of time, her $40,000 will have a value of $317,000. Mr. B who saved the identical $40,000 but began twenty years later will have a significantly smaller amount. Just $82,000. The difference, time!

This is just an example, but it demonstrates that time is an integral yet often overlooked component of investing. Over an extended period of time, the investment world will have its ups and downs. That’s why investors need to begin at a young age and use time to their advantage.

It doesn’t matter what kind of device you use to keep time. It could be with an old sand-filled hourglass or your great grandfather’s Swiss pocket watch. Perhaps you sport a Rolex or maybe even the new high-tech watch from Apple.

What does matter is how you manage time. So, come age 60 when you’re thinking about retirement, which song will you be singing? The Willie Nelson classic “Ain’t It Funny How Time Slips Away?” Or the early Rolling Stones song “Time Is On My Side?”

If you start investing early, I know the answer.

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