It is easy to get excited when investing, especially when the markets are rising. But, unfortunately, we often forget the mistakes we made in the past when the markets started declining again. So here are 5 timeless rules of investing that will take you back to investing basics and help you keep your cool.
Rules of Investing 1: Let your money work for as long as it can (time is your friend)
“Time is your friend, impulse is your enemy. Take advantage of compound interest and don’t be captivated by the siren song of the market.”– Warren Buffett
This graph shows how a one-time investment of $10K grows over time. At the end of 10 years, when assuming a growth rate of 7%, your $10K investment would have grown to just under $20K. What would happen if the money were allowed to grow for another 10 years? The capital would have appreciated to $38K at the end of 20 years. And, what if the money were allowed to appreciate for another 10 years? The value of the investment would go to $76K. That’s a 7.6X return on your initial investment just for holding the money for 30 years.
Remember, when investing, time is on your side.
Rules of Investing 2: Start investing early
To illustrate the importance of starting early, let’s track the investment strategies of Jack and Jill. Both Jack and Jill are 25 years old and entered the workforce at the same time. Jack saves $500 every year from the day he started working. Jill waits until she is 30 to start investing and wants to catch up with Jack in year 30. To catch up with Jack, Jill has to invest 50% more than Jack every year. At the end of 30 years, Jack and Jill both have around $50K, but Jack only invested $15K to get there, whereas Jill had to invest $18,750.
Rules of Investing 3: Want to save your way to a million dollars? Here’s what you need to do
“The habit of saving is itself an education; it fosters every virtue, teaches self-denial, cultivates the sense of order, trains to forethought, and so broadens the mind.”–Thomas T. Munger
|Years to $1M||Yearly deposit||Total invested||Interest earned||Balance in the end|
|10||$ 67,650||676,500||$ 323,968||$ 1,000,468|
|20||$ 22,800||456,000||$ 544,761||$ 1,000,761|
|30||$ 9,898||296,940||$ 703,481||$ 1,000,421|
|40||$ 4,685||187,400||$ 812,726||$ 1,000,126|
|50||$ 2,300||115,000||$ 885,110||$ 1,000,110|
This graph could have easily been called ‘in defense of the slow dollar.’ It takes about 6 times more investment deposits to save a million dollars in ten years than it does to save a million dollars in 50 years. This graph extols the virtue of rules one and three at the same time. Giving your money time to appreciate means you have to forego less today. Starting investing early ensures that you have time on your side. An 18-year-old has 50 years to save for retirement and can therefore afford to invest for 50 years. A 40-year-old doesn’t.
Rules of Investing 4: Invest wisely
“Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”– Warren Buffett
Rules 1, 2, and 3 show you how your money can work for you. Rule 4 shows you how you can work for your money by investing it wisely. Assume you had $500 to invest at the beginning of every year. A 7% average rate of return is par for the market, and you would have $50K in savings at the end of 30 years. What if you put some effort into determining the stocks you should go after.
Through a deep understanding of the businesses you consider investing in, what if you could better the market by 1%? That now puts $61K in your pocket. What if you could better the market by 2%? Your returns now push $74K. You end up making 20% more income when you go from 7% returns to 8% returns. A jump from 7% returns to 9% returns would land an extra 47% in your pocket.
Rules of Investing 5: Save as much as you can
“Make all you can, save all you can, give all you can.”– John Wesley
This graph shows you what your balance could be if you were to save $10K per year, $15K per year, and $25K per year. As you can see, the balances trend upward significantly when saving as much as you can.
|Yearly contribution||Total invested||Interest earned||Balance in the end|