I recently spoke to Oxford Club employees about the importance of investing in a 401(k) plan and starting early. That last part is important.
Most people think that in order to be a successful investor, you need to earn a high rate of return. Sure, that’s a contributing factor, but the most important thing you can do as an investor is start early.
If it’s too late for you to start early, start now or add to your holdings.
If you saved $3,000 per year, or $8.21 a day, in a tax-deferred plan like a 401(k) or IRA and earned 8% per year (the historical stock market average), you would have $148,000 after 20 years, $237,000 after 25 years and $367,000 after 30 years.
But let’s say you picked some bad investments or were simply more conservative and your returns were only 6% per year. You’d still arrive at the $367,000 figure after 35 1/2 years.
Despite a return that is 25% below the historical average, it would take you only 5 1/2 additional years to arrive at the same $367,000.
And look what kinds of returns you’d need in order to hit the same $367,000 at 8% for 30 years if your timeline is shorter.
To wind up with $367,000 over 25 years, you’d need to earn 10.8% per year.
To wind up with $367,000 over 20 years, you’d need to earn 15.3% per year.
The 10.8% figure is doable if you’re in quality investments with low costs. Most investors don’t earn double digits over the long term, though 12% average annual total returns is the goal of my 10-11-12 System featured in my book Get Rich with Dividends and The Oxford Income Letter.
If you’re earning 15.3% per year for 20 years, you’re doing terrific. It’s achievable but not easy.
So you can see how vital it is to invest long term – the longer the better.
Fidelity conducted a study to see which of its accounts performed the best. The results were shocking.
The best-performing investors were dead investors.
In other words, no one touched the account. They let it ride. No overtrading, buying or selling. Just time working its magic.
I concluded my talk to my colleagues with a quote from the legendary trader Jesse Livermore: “It never was my thinking that made the big money for me. It always was my sitting.”
I realize many of you don’t have a 30-year time horizon. I certainly don’t. But whatever yours is, you need to put money to work now. Every month that you wait is a drain on your return.
And if your investing horizon isn’t particularly long, I’m sure you know someone whose is longer – like a kid or grandkid. Get them started now if they haven’t already, and in 25, 30 or 40 years, they’ll be so thankful that you did.