Never Forget the Power of Time When Investing
By Barry Waxler
The world of finance is one that can be confusing and
complex. The huge amount of information available can lead
to a feeling of being overwhelmed. It need not. There are
some basic rules that can set you on the way to success.
Your choices when it comes to investing are staggering. For
the conservative, there are government bonds. For the super
aggressive, there are commodities. For most, mutual funds
and stocks make a perfect solution.
After a while, it can be easy to wonder not only who is
correct, but what you should do with your personal financial
situation. Ultimately, the answer is you can make money in
nearly every area of finance, but only if you follow some
Time is on your side. Besides being a good lyric, this
statement is true when it comes to investing. Time has a
tremendous cumulative effect. Oddly, you never hear the
financial gurus talk about it. This is probably because they
cannot sell you time.
Why is time valuable? Basically, the more of it you have,
the better you will do. As time passes, the results you
obtain are going to have a bigger cumulative effect. If the
trend is positive, the total return on your activities will
Consider a practical example. The rule of seven in
financial circles says an investment that returns a ten
percent annual average will double in seven years. Why?
Because the gains are reinvested and then grow as well.
This is a simple, yet profound rule. The power of time is
found in the fact that your gains are reinvested and then
begin to grow as well. It is like kicking in the turbo on a
car. The longer you do this, the bigger the impact.
Enough with abstract examples! How about your IRA. Assume
you get a 6.9 percent return. Assume you invest for 30 years
and put in $2,000 each year. When it is retirement time, you
will have over $185,000 in your account.
Now we can see the power of time. Assume we start investing
15 years later. All the figures are the same, but we actually put in
$4,000 each year. We end up with a total of just under
$100,000, even though we invested the same amount. Why? Because
our gains did not have time to grow as well.
Now, what is the one difference between these scenarios? We
invested the same total amount. The only difference was the
time over which we did it. The longer time period gave our
money time to grow and grow again, known as compounding.
This is a simple rule you should take heart in. The issue
is not really how much you invest, but how often. If you put
$100 a month in an investment for 30 years, you are going to
end up with a nice total at the end of that time.
Barry Waxler is a financial
advisor with www.ufcamerica.com.
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