Updated: Feb 14, 2019
Wall Street doesn’t want you to know about it because it is boring. Your brain can’t fathom it. And most people know about it but don’t take advantage of it.
The #1 investing secret is none other than compound interest. In other words, time.
Let’s run through a scenario.
Picture this: Phil and Todd are new college graduates and best friends. They both end up getting great jobs at the same investment bank right out of school. However, Phil knows about the power of compound interest so he saves as much as he can during the first year of work, but Todd doesn’t really care much about it because it isn’t interest-ing (pun intended).
After expenses, Phil saves up almost $11,000 during the first year, $10,733.80 to be exact. Todd doesn’t save anything because it is too difficult to save.
Phil decides to put all $10,733.80 into the stock market. Todd, well, he just bought a new car.
Fast forward 30 years, both guys are 53 years old. Phil hasn’t put a penny more into the market since that first year after college. He decided to become the head of a non-profit organization and so he makes just enough to cover living expenses but no more. It’s a simple life.
On the other hand, Todd wakes up one night in a sweat. He realizes he hasn’t thought about retirement at all. He was too busy trying to impress everyone with lavish vacations, European sports cars, and a ritzy zip-code. So he buckles down and decides he needs to start saving and investing as soon as possible. He makes quite a bit of money so he starts socking away $20,000 a year. And he does this for the next 20 years. In total, he saves $400,000.
Fast forward another 20 years, and both guys are 73. Who do you think came out ahead?
Phil who put less than $11,000 dollars in the stock market one year post-grad? Or Todd, who saved $20,000 a year for 20 years?
If both men received the same 10% returns over time, the results actually come out as a tie. Well, Phil will be 5 cents poorer.
Phil’s total at 73: $1,260,049.94
Todd’s total at 73: $1,260,049.99
Phil’s amount put into the market: $10,733.80
Todd’s amount put into the market: $400,000
There is so much financial advice circulating in the news and on blogs and on TV, but this lesson is really the only one you need to grasp. Be Phil, not Todd. In finance, rather than counseling, time heals. Let time do its thing.
Just to add one more tidbit. In my opinion, it is possible to achieve market-beating returns if you are willing to do the research. By picking great companies, you should, by definition, be able to beat an index since it includes average companies as well. Many people will fight me on this but that’s just fine.
A third person, a friend of Phil’s and Todd’s named Gene Yus was really interested in the stock market and so he tried his hand at stock picking. He only invested the same amount as Phil but he got much better returns, to the tune of 15%. Do you want to guess what he ended up with at 73?
Gene’s total at 73: $11,631,762.25
Gene’s amount put into the market: $10,733.80
From under $11,000 to over $11 million. And ten times more than Phil and Todd because he returned an excess of 5 percentage points over time. Of course, this is not easy at all but I do believe it’s possible if you are willing to put in the work and continuously improve as an investor. And that is where Investing City can help!
Gene Yus’s Results:
The underlying point is simple: take advantage of the time you have. Just as it is in life, we want to make the most of it, but it can be difficult if we don’t have a purpose or direction. And in terms of finances, life gets in the way. Bills, education, loans, kids, so many things. Just try to remember one thing: the earlier you get started, the better.
p.s. If you read this and thought to yourself, “This doesn’t apply to me, I don’t have 50 years left,” do your best to pass on the message to those who do!