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| Willy and his workers |
Here's the answer: today. Time is our greatest investment ally. A corollary is that procrastination is our greatest enemy.
Andrew gives you the math based on compounding. Compounding is simply earning interest on your interest! If this is a new concept for you, read carefully the story of Star and Autumn. Star invests $32,400 to end up with $1,050,180 and Autumn invested $240,000 and ended up with $813,128!
There is a rule of thumb (about which we will say more later) that says you can safely spend 4% of your nest egg and not run out of money. With this rule of thumb, Star can start spending approximately $42,000 at age 65 and Autumn can spend approximately $32,000! So, the compounding math works into real standard of living consequences, dependent on using time wisely.
If you like to do math, you can do the same thing yourself for your specific age. You can work up the impact of, say, investing $5,000/year now versus waiting 5 years to start investing. What's the difference if the market returns 6%,8% or 10%? .
Note that Andrew started investing when he was 19 years old.
WHEN DID OR WILL YOU START INVESTING?
When this time issue comes up, light bulbs go off for many parents. Their inclination is to want to set aside money for their young children to take advantage of compounding over a long period. Here's Andrew's response, which I agree with: "Giving money promotes weakness and dependence." Instead, Andrew stresses to teach young children money lessons. Teach your children how to invest and how to manage their lifestyle so that they have money to invest!
Gifting money to yourself is, of course, different. Andrew tells how Tom and Julie tracked their spending and found that they could cut spending and maintain their lifestyle, thereby producing investment funds.
In my situation, I had a job that paid a nice bonus once a year. Many of my co-workers actually spent the last three months of each year trying to figure out what the bonus would be and actually had their bonus spent before they even got it. I (patting myself on the back) was satisfied with my family's life style and sort of looked at the bonus as found money. I invested it each year and figure that, in the end, it gave me about 5 years of extra semi-retirement!
At the very least, I would recommend that at least half of any type of "found money" be invested. Surprised that you're getting $1,000 tax refund? Invest at least $500!
As another example, I knew a young lady who a short time ago won $20,000 in the lottery. She is a low-income worker with about $40,000 invested for retirement in her company 401(k). I suggested she put $5,000 of her lottery winnings (which she didn't like!) in her investments. Like a lot of people in their mid-30s, it is hard for her to understand that one day she will be 65, tired of working, and that her future self will be very grateful for the delayed gratification that enabled her to set aside funds!
HOW DO YOU TREAT "FOUND MONEY"? WHAT KIND OF "FOUND MONEY" DO YOU COME ACROSS?
I hope you have read Charlie and the Chocolate Factory by Dahl because Andrew uses it to give a nice example of how the stock market works. This really strikes a chord with me because I see so many young people who view the market as a casino. And, actually, this is warranted if you are in the market trying to time it and pick and trade individual stocks and, at the extreme, day trading by jumping in and out during the day. But this isn't what investing is about, as shown by the Willy Wonka example. INVESTING IS ABOUT OWNING REAL BUSINESSES THAT ARE PROSPERING!
Sadly, Wall Street and the brokerage community have a huge incentive to get you to trade like a maniac. They have very smart people, creating clever commercials (with talking babies, etc.) to get you to open trading accounts. If you go this route, you may just as well head for the casinos of Vegas.
HOW DO YOU VIEW INVESTING?
I have been reading about investments for many years and have invested over time. I still find I end up stuck in analysis paralysis more often than not. I contribute to my brokerage account at least once per quarter but actually pulling the trigger and buying something is so hard. I have been trying to reallocate my investment portfolio for most of this year as I am over 60% in cash but still cannot make an actual purchase.
ReplyDeleteThanks for the comment Linx. Your "dilemma" is faced by many investors. The approach recommended by Andrew Hallam helps in that it suggests you get an asset allocation that you are comfortable with and then invest in low cost well diversified funds. That way you are buying the entire market or sector and are not getting caught up in analysis - stock picking or market timing. In terms of trying to time the market the evidence shows that even the professionals get it wrong. There are too many things you can't control (think: our government actually governing responsibly or Syria flaring up).
ReplyDeleteI like to think of the investment process as going on an ocean voyage. You know going in that there will be days where it will be rough sailing and you'll wonder why you went. Other days will be fantastic and you'll wish you could spend your entire life at sea. The point is to stick with and you'll reach your destination.
Finally, if none of this helps then you may need to seek professional help. Find a good fee only, low cost advisor who will invest you in low cost well diversified funds.
I have had clients who managed their own money and woke up in the middle of the night checking on their accounts. If the market went up they had a good day and if it dropped they were miserable. It is not worth the aggravation.
Finally, think of cash as a third asset class - one that gets eaten alive by inflation.
Again, thanks for the comment!