3 Things 8-24-26

 Thing One

The Most Valuable Thing You Can Put Into An Investment Is Time

I came across an example recently that does a good job explaining compound growth.

Imagine two people who both invest $3,000 a year and retire at age 70.

The first starts at 22, invests $3,000 a year for 15 years, and then stops completely at 37. His total lifetime contribution: 15 years × $3,000 = $45,000.

The second does nothing for those first 15 years. He starts at 37 and invests $3,000 every single year until age 70. He saves for 33 years.

His total lifetime contribution: 33 years × $3,000 = $99,000.

So the second person contributes $54,000 more and saves for more than twice as many years. You would naturally expect him to finish with more money. But he doesn't. Using the same hypothetical 10% annual return I'll use throughout this example, here's what happens.

The 22-year-old's $3,000 annual contributions grow to about $95,000 by age 37. Then he never contributes another dollar. He simply leaves that money invested for the next 33 years. At 10% annual growth:

$95,000 × 1.10³³ ≈ $2.21 million at age 70.

Now look at the person who waits until 37. He contributes $3,000 every year for the next 33 years—putting in $99,000 of his own money. At the same 10% hypothetical return, he reaches age 70 with approximately $667,000.

Think about that.

Person #1Started: 22Years contributed: 15Total contributed: $45,000Value at 70: ~$2.21 million

Person #2Started: 37Years contributed: 33Total contributed: $99,000Value at 70: ~$667,000

The second person saved more than twice as much of his own money. He saved for more than twice as many years. And he ended up with roughly $1.55 million less. Why? Time. Not a better stock. Not better discipline. Not a bigger paycheck. A calendar.

We tend to think about investing primarily in terms of how much. How much can I afford to save? How much do I need for retirement? How much should I put in my 401(k)? Those are important questions. But there is another question that may be every bit as important: When did the money get there? A dollar invested today doesn't just have the opportunity to earn money. The money it earns can earn money. Then that money can earn money. Given enough time, the original dollar almost becomes the least interesting part of the story.

Here's an extreme example. The stock market has historically returned roughly 10% annually over very long periods. That certainly doesn't mean it will return 10% every year—or that future returns will match the past—but let's use 10% simply to demonstrate the power of time.

Invest $1,000 at birth, earn 10% annually, and never add another penny.

At age 67, that's about $593,000. One thousand dollars became more than half a million dollars without another contribution.

Now let's involve the parents or grandparents. Suppose they contribute just $50 a month — $600 a year — from birth through age 67. At that same hypothetical 10% return, those contributions grow to roughly $3.55 million. Make it $100 a month, and that's about $7.1 million.

And here's where it gets really interesting. Most people's ability to save increases as their income increases. So instead of contributing the same amount forever, suppose you start at $100 per month and increase that amount just 3% each year. Under the same 10% hypothetical return, those contributions grow to roughly $10.0 million by age 67. Add an initial $1,000 invested at birth, and you're around $10.6 million.

Now, before somebody quits their job based on this post, these are illustrations. Markets don't return 10% like clockwork. There will likely be crashes, recessions, inflation, taxes, changes in contribution limits, and probably a few moments when everybody is convinced the world is ending. That's actually part of the point. You don't need perfect conditions. You need time. And that is one reason I think the new Trump Accounts are potentially much more significant than the politics surrounding them.

Under the new law, eligible children born from 2025 through 2028 can receive a $1,000 federal contribution at essentially the beginning of their lives. Families and others can contribute additional money subject to the applicable limits. The government contribution is nice. But the really powerful part isn't the $1,000. It's the WHEN.

We're talking about putting investment capital to work near the beginning of a person's life and potentially giving it six decades or more to compound. And if the name "Trump Account" causes you emotional distress, I've got good news. You can call it by its tax-code name: A Section 530A account. There. Problem solved. You don't have to make friends with the current President. Just make friends with compound interest. Because this principle has absolutely nothing to do with Donald Trump, Republicans, Democrats, or politics. It applies to a 530A account. It applies to a Roth IRA. It applies to a 401(k). It applies to an ordinary investment account. And it applies whether you have $50 a month to invest or $5,000. Average people don't necessarily have to find the next NVIDIA, inherit a fortune or make one spectacular investment to accumulate meaningful wealth. They can do something considerably more boring: Start. Then keep adding. Increase the amount when income allows. Own productive assets. And give those assets something money cannot buy back later - time.

Every investment account really does have two numbers - the amount and the when. We spend an awful lot of time worrying about the first one. Maybe we should pay a little more attention to the second. 

Thing Two  

Should We Let Markets or Politicians Decide?

In 1979, legendary talk-show host Phil Donahue sat down with Milton Friedman, the Nobel Prize-winning economist and one of the most influential advocates of free markets of the 20th century.

Donahue challenged Friedman about capitalism, greed, inequality and poverty. But underneath their exchange is a broader and still very relevant question: When it comes to organizing economic life, should we put more faith in markets or in politicians? It's pretty clear which one Friedman would pick.

Here is their exchange: 

Phil Donahue: When you see around the globe the maldistribution of wealth, the desperate plight of millions of people in underdeveloped countries, when you see so few haves and so many have-nots, when you see the greed and the concentration of power… did you ever have a moment of doubt about capitalism and whether greed’s a good idea to run on?

Milton Friedman: Well, first of all, tell me: is there some society you know that doesn’t run on greed? You think Russia doesn’t run on greed? You think China doesn’t run on greed? What is greed? Of course, none of us are greedy. It’s only the other fellow who’s greedy.

The world runs on individuals pursuing their separate interests. The great achievements of civilization have not come from government bureaus. Einstein didn’t construct his theory under order from a bureaucrat. Henry Ford didn’t revolutionize the automobile industry that way.

In the only cases in which the masses have escaped from the kind of grinding poverty you’re talking about, the only cases in recorded history are where they have had capitalism and largely free trade. If you want to know where the masses are worst off, it’s exactly in the kinds of societies that depart from that.

So the record of history is absolutely crystal clear that there is no alternative way, so far discovered, of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.

Phil Donahue: But it seems to reward not virtue as much as ability to manipulate the system.

Milton Friedman: And what does reward virtue? You think the communist commissar rewards virtue? You think a Hitler rewards virtue? You think—excuse me, if you’ll pardon me—do you think American presidents reward virtue? Do they choose their appointees on the basis of the virtue of the people appointed, or on the basis of their political clout?

Is it really true that political self-interest is nobler somehow than economic self-interest? You know, I think you’re taking a lot of things for granted. And just tell me where in the world you find these angels who are going to organize society for us.

I don’t even trust you to do that.

Thing Three

Just A Thought  

 “We must all suffer one of two things: the pain of discipline or the pain of regret.” - Jim Rohn