“The best time to plant a tree was 20 years ago. The second best time is now.”
A reader writes; “Investing in your 20s… You don’t have high income yet, but you have time on your side. How do you use that to your advantage for a long term approach?”
In answering this question I will go straight to what Albert Einstein called “The Eighth Wonder of the World” – compounding interest. Consider the ‘Rule of 72‘, which is a quick and easy way to determine how long an investment will take to double using a fixed annual rate of return. Divide 72 by your annual rate of return and you’ll get a rough idea of how many years an investment will take to double.
What We’re Up Against
I find many Millennials terrified of the stock market while Baby Boomers and Gen-Xers are addicted to the drug of American consumption. I recently came across an article by Neal Gabler in which he details what he calls “Financial Impotence”. In his essay he describes himself as one of the 50% of all American who would be unable to come up with $400 cash to cover an unexpected emergency – an unbelievably shocking number. He writes; “Financial impotence has many of the characteristics of sexual impotence, not least of which is the desperate need to mask it.” I highly recommend you read the entire article. It time to get on the move.
So How Do We Prevent This?
The long term average return of the S&P500 is a little over 11% but for simple math let’s call it an even 10%. Let’s back out 3% for inflation and extreme market swings and we’ll have a conservative 7% annual rate of return. Using the Rule of 72 we can expect to see our investments double every 10 years (72/7).
So let’s go back and look at a 20 year old who drops $1 into the stock market. At age 30 he’ll have $2, at 40 he’ll have $4, and 50 he’ll have $8, at 60 he’ll have $16, at 70 he’ll have $32, and at 80 he’ll have $64. Keep in mind that is real spending power at 80 years of age, as we have factored inflation into our results!
It is true that at 20 you may not have a high income or the ability to save a lot of money, but does that mean you should wait until later to begin saving and investing? No. Anything you can save at 20 (or before) gets put into the magic compounding machine and will increase over the long term in dramatic fashion.
When you are young your income may not be an advantage, but time is most definitely on your side. Live frugally, kill your debt, and get your money invested in low-cost diversified index funds where it can go to work for you over a long timeframe. Factor this savings into your budget, and auto-draft it so you never have to think about it. Every time you get a raise adjust your auto-draft upwards in proportion. Take a portion of any “windfalls” along the way and drop them into your index funds. Set a goal to max out your Roths and then move on to Traditional IRAs as your budget allows. When you’re sitting outside your beach house at 45 drinking ice cold Red Stripes, be sure you toast The Man on the Move.
The NYT and WaPo recently ran a story about Ronald Read, a man who worked as a janitor and a gas station attendant his whole life and left an $8,000,000 stock portfolio to charity when he recently passed away at 92 years old. 8 million bucks??? What was his secret?
He began investing at age 37 when he bought 39 shares of Pacific Gas & Electric for $2,380. And he held them, he reinvested the dividends, and he saved and bought other stocks – 95 in total with names like Procter & Gamble, JPMorgan Chase, General Electric, Johnson & Johnson, Dow Chemical, J.M. Smucker, and CVS Health. He was not a “trader” but a true “buy and hold” investor.
Ronald Read worked jobs that paid around $12/hour, lived frugally, and invested his money into the large blue-chip companies that drive the US economy, and across a 55 year time span he amassed a fortune. The amazing thing is to read the comments in the news stories about him. Folks ridicule his old Toyota Yaris, his old worn out clothes, and the fact that he never spent the fortune he made. One comment claims his story is ” a sad story of a life lived for a tomorrow that never came.”
Man if this is not a comment on today’s consumer-driven culture where appearance counts for way more than than just about anything else, I don’t know what is. If you dig deeper you’ll see Ronald Read enjoyed investing, he enjoyed the research and the rewards of watching his money grow. His ultimate motivation was not flashy wealth, fancy cars, big houses, and mega vacations. His driving force was altruism, just like so many of the “dirty & greedy” 1-percenters the media loves to denigrate. He hid his wealth from his friends, and even his family, and left his fortune to a local hospital and the local library where he would spend his time doing his stock research.
This is a great lesson in frugality, disciplined saving, and investing. Those earning $12/hour aren’t supposed to be wealthy – they’re supposed to be picketing for $15/hour. This is also a lesson in perception. Janitors and gas station attendants aren’t supposed to be among the wealthy 1%, and those wealthy 1% aren’t supposed to have altruistic motivation. They are supposed to hoard their wealth with their heel on the throat of those less fortunate. The irony here is that Ronald Reade was, in the world’s view, supposed to be one of those less fortunate.
Boil it all down and I think we will see, $8,000,000 later there is a lesson to be learned by all of us – time is indeed on our side… cheers!