Time is such a valuable commodity that it's a shame when investors squander it. Yet many investors do, wasting a resource that can't ever be recovered.
Time is an investor's most valuable ally because returns increase exponentially over time -- as close to magic as most of us will ever see.
Investment returns increase exponentially over time, which is as close to magic as most of us will ever see.
To see just how valuable this element is, consider the case of a 20-year-old wishing to retire at age 60 with $1 million. Assuming an 8% return, future millionaires in this category need only deposit $3,574 per year ($68 a week) to reach that goal. Over their 40-year careers, they will deposit only $142,969; the balance will come from earnings on the account.
Every day these investors wait to get started costs them in annual deposits and total deposits over their career. The longer they wait, the more likely it becomes that they won't reach the goal.
Avoid these common mistakes to keep time working for you:
Raiding the retirement account
A disappointingly huge percentage of workers fail to roll over their pension and profit-sharing accounts when changing jobs, instead using the funds for everything from vacations to new cars. It's especially important to keep all your retirement accounts at work. While the amounts may seem relatively small, left to accumulate tax deferred in an IRA they will grow to substantial amounts. For instance, $10,000 left to grow at 8% for 30 years will be worth $100,626 when it's needed for retirement.
Taking a flier
Some delusional investors rationalize that a series of high-risk investments will average out over time and that a loss today can be made up by tomorrow's gains. These serial losers buy into one deal after another that sounds too good to be true, hoping for a huge payoff. This gambler's mentality has almost nothing to do with investing, and rarely leads to anything but financial ruin.
Anything less than a fully diversified portfolio magnifies risk without increasing expected return. No investor should ever bear a risk that could be diversified away. They can't afford for all or a large portion of their savings to vaporize. The more concentrated a portfolio, the more opportunity for something awful to happen. (Just ask any Enron employee how he likes his company stock now.) Avoid sector funds, individual stock holdings and funds with concentrated positions.
Keeping your funds in play with reasonable investment strategies and constant discipline is just as important as starting early. Blowing your nest egg up along the way destroys your most valuable alley in the quest for financial independence.