Man, I go away for three weeks, leaving you lot in charge, and look what happens.
Sydney is in lockdown, borders have again been slammed shut, the economy is losing around $1 billion a week, and the ASX fell 1% on Friday.
The good news? I’m back, and the ASX futures are pointing to a 1% gain this morning.
I jest, of course.
I mean, I hope it’s good news. And I hope the ASX gains, today. But I can’t claim any credit…
The lockdown is terrible news on half a dozen fronts. It will impact those looking for work and those who will be bundled out of a job. It sucks for businesses, just getting back on their feet (in particular hospitality businesses in the CBD, but others, besides). It is awful for those who are crook with COVID and their loved ones, and it’s pretty ordinary for the rest of NSW in general and Sydney in particular, whose movements and freedoms have been (rightly, in my opinion, if unfortunately) curtailed as the authorities again scramble to stop the spread.
Now, this isn’t the place to debate government health and public policy actions, necessarily, but I’ll make a slight exception to give me a stepping off point for a financial analogy. See, the NSW government, in a bid to take a ‘gently, gently’ approach, decided to wait and see.
They waited, and now we see.
The cost of delay is likely to be measured in weeks (months?) of extra lockdown, now that the case count has hit triple figures, daily. The road back from here is going to be long, and very likely much, much longer than it would have been, had the authorities implemented a short, sharp lockdown early on.
I know some people are generally anti-lockdown, and fair enough. But if we knew that some sort of lockdown was going to be the result of an explosion in cases, then it was only ever a matter of when, and for how long.
Now, unfortunately, we’re paying the piper.
I tread (carefully) into this controversial area because it touches on a couple of important points: the value of time, and the (related) phenomenon of exponential growth.
A stitch in time, said my Granny, saves nine. She knew it, but the NSW government either forgot it, or hoped that two or three stitches might have been enough.
The same applies to our investing.
You’ve seen the examples before, but here’s a simple one.
Two people: Jane and Bob.
Jane saves $1,000 each year, between 18 and 30, for a total of $12,000. At retirement, and assuming a 10% return per annum, Jane will have $800,000.
Bob starts at 30. He puts in $2,000 per year — double Jane’s contribution — for the next 37 years (three times as long as Jane). His total contribution is $74,000. At retirement, Bob has $660,000, a full $140,000 less.
So does exponentiality.
Here’s a parable I learned when I was 11 or 12. I can’t find the original version I read, but this is a good summary:
“Suppose you own a pond on which a water lily is growing. The lily plant doubles in size each day. If the plant were allowed to grow unchecked, it would completely cover the pond in 30 days, choking off all other forms of life in the water. For a long time the lily plant seems small, so you decide not to worry about it until it covers half the pond. On what day will that be? On the twenty-ninth day. You have just one day to act to save your pond.”
Now, I’ll leave the health implications alone here — I don’t need the grief and you don’t need the aggravation. But the idea of exponentiality is so poorly understood — or perhaps, easy to understand but hard to truly internalise — that in many parts of our lives, we just don’t take it to heart.
And never more than with our finances.
Let’s go back to the example of Jane.
Of her final $800,000, compounded over almost 50 years, how much do you think she made in the last 5 years?
That is, if she’d had 5 fewer years of compounding, she’d have shaved off nearly 40% of her final amount.
The last 10 years?
$491,000. Much more than half.
Now, I talk about ‘the last 10 years’, and that’s how many of us think.
But it’s not really ‘the last 10’ is it?
I mean, unless she retired early (or passed away), those last 10 years are going to happen.
It’s actually the ‘first 10 years’.
It would have been the impact of starting a decade later, like our example of Bob.
(I gave Bob some generous help, by letting him add more each year, and for longer. Without it, he would have been much, much worse off — and even further behind Jane.)
See, my day job is to do my best to help you earn superior returns by picking stocks that I think will beat the market (on average, and over the long term). And I’m pleased to say that, so far, my colleagues and I have a pretty good track record, across our services. The service I run, Motley Fool Share Advisor, is soundly ahead of the market, after almost 10 years of picking one ASX stock each and every month.
But here’s what I can’t do:
I can’t make you save more.
And I can’t make you start earlier.
Only you can do that.
Sure, you can wait. You can plan to start ‘later’. You can plan to add more, ‘later’.
And I’m not here to judge. Maybe you have very valid reasons for waiting.
All I’m saying is that you can’t cheat time. And you can’t cheat compounding.
And that waiting, no matter how justifiable, can be very costly.
Why not get started (and/or add more money, more regularly) today?
And why not tell your family and friends — particularly the younger people in your life — so they can be more like Jane?