Of course, it has its limits. I liked the subject matter, but mostly how you explained saving and went thru the process. Very sound advice. Compound interest is indeed a miracle of finance. If I'd have only paid more attention to my father's advice about saving early.
It's amazing how nicely it works - the downside to being young though is that you DON'T know about investing generally. But it really is amazing!!! Ryan, that is exactly right. It isn't rocket science, yet until you see the possible outcomes that a few years can make, it doesn't always sink in. And what sucks about time is that you can't make any more of it. Once you let 5 years go by before saving, or investing, or whatever, you can't make that time up. It is gone forever, so unless you want to wait another 5 years at the end of life to delay in using that money, it is time that is completely lost.
That's why it doesn't matter if you can only save 5 bucks a month or , every little bit, as soon as possible can and does matter. I meet with so many people who think that since they can't save a lot, they might as well not save at all. That is the wrong attitude that will only come back to bite you later in life. Great post! So, to summarize, time is an investor's best friend.
Obviously the earlier you start, the more money you will have when you retire, but the differences in just a few years are enormous. Swamproot, that's right, there are a few other rules of thumb you can use as well. Good link to mention the others as well. And that's right TDG, investing isn't rocket science, yet people do their best to make it more complicated than it has to be.
Obsessing over a difference in 20 basis points, trying to build a bulletproof portfolio, and timing the market all typically create more stress than anything. The bottom line is: save money, invest it prudently, and give it time to grow. Compound interest will eventually work its magic. I like this post because it highlights that fact that investing is not rocket science.
Often we get so mired in the details we forget to take a step back and break things down to their basics. Sign in. Post comment. Newest Oldest. Einstien also said that "compound interest is the most powerful force in the universe. Indeed, we should all make our money work hard for us!
And like the car, you have a few options: You can pay it, accepting volatility and uncertainty. You can find an asset with less uncertainty and a lower payoff, the equivalent of a used car. Or you can attempt the equivalent of grand theft auto: Take the return while trying to avoid the volatility that comes along with it.
Many people in this case choose the third option.http://listingcambodia.com/includes/3159-localiser-telephone.php
How much interest do you earn on one million dollars?
Like a car thief — though well-meaning and law-abiding — they form tricks and strategies to get the return without paying the price. But the Money Gods do not look highly upon those who seek a reward without paying the price. Some car thieves will get away with it. Many more will be caught with their pants down.
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Same thing with money. This is obvious with the car and less obvious with investing because the true cost of investing — or anything with money — is rarely the financial fee that is easy to see and measure. But it lost more than half its value on five separate occasions during that time. That is an enormous psychological price to pay. But he did it by reading SEC filings 12 hours a day for 70 years, often at the expense of paying attention to his family.
Here too, a hidden cost. Every money reward has a price beyond the financial fee you can see and count. Accepting that is critical. It sounds trivial and obvious, but if you unpack the idea it has extraordinary power. The paradox of wealth is that people tend to want it to signal to others that they should be liked and admired. It is prevalent at every income and wealth level. There is a growing business of people renting private jets on the tarmac for 10 minutes to take a selfie inside the jet for Instagram. Or even fancy cars — I like both.
A tendency to adjust to current circumstances in a way that makes forecasting your future desires and actions difficult, resulting in the inability to capture long-term compounding rewards that come from current decisions.
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Every five-year-old boy wants to drive a tractor when they grow up. So as a teenager you dream of being a lawyer. Then you realize that lawyers work so hard they rarely see their families. So then you become a stay-at-home parent. Then at age 70 you realize you should have saved more money for retirement. Things change. This gets back to the first rule of compounding: Never interrupt it unnecessarily. But how do you not interrupt a money plan — careers, investments, spending, budgeting, whatever — when your life plans change?
Part of the reason people like Grace Groner and Warren Buffett become so successful is because they kept doing the same thing for decades on end, letting compounding run wild. Or anything close to it. So rather than one something-year lifespan, our money has perhaps four distinct year blocks. There is no solution to this. Anchored-to-your-own-history bias: Your personal experiences make up maybe 0.
If you were born in the stock market went up fold adjusted for inflation in your teens and 20s — your young impressionable years when you were learning baseline knowledge about how investing and the economy work. If you were born in , the same market went exactly nowhere in your teens and 20s:. There are so many ways to cut this idea. Someone who grew up in Flint, Michigan got a very different view of the importance of manufacturing jobs than someone who grew up in Washington D. The Great Depression scared a generation for the rest of their lives. Most of them, at least. In John F.
Kennedy was asked by a reporter what he remembered from the depression, and answered :. I have no first-hand knowledge of the depression. My family had one of the great fortunes of the world and it was worth more than ever then. We had bigger houses, more servants, we traveled more. About the only thing that I saw directly was when my father hired some extra gardeners just to give them a job so they could eat. I really did not learn about the depression until I read about it at Harvard. The problem is that everyone needs a clear explanation of how the world works to keep their sanity.
So they use the lessons of their own life experiences to create models of how they think the world should work — particularly for things like luck, risk, effort, and values. Things will make more sense. Historians are Prophets fallacy: Not seeing the irony that history is the study of surprises and changes while using it as a guide to the future.
An overreliance on past data as a signal to future conditions in a field where innovation and change is the lifeblood of progress. Geologists can look at a billion years of historical data and form models of how the earth behaves. So can meteorologists. And doctors — kidneys operate the same way in as they did in The idea that the past offers concrete directions about the future is tantalizing.
It promotes the idea that the path of the future is buried within the data. Historians — or anyone analyzing the past as a way to indicate the future — are some of the most important members of many fields. The cornerstone of economics is that things change over time, because the invisible hand hates anything staying too good or too bad indefinitely.
Bill Bonner once described how Mr. The K is 39 years old — barely old enough to run for president. So personal financial advice and analysis about how Americans save for retirement today is not directly comparable to what made sense just a generation ago. Things changed. The venture capital industry barely existed 25 years ago. There are single funds today that are larger than the entire industry was a generation ago. An aspiring young entrepreneur had very few places to turn, and those places were all guarded by risk-averse gatekeepers with zero imagination.
In other words, bankers. Or take public markets. Technology stocks were virtually nonexistent 50 years ago. Accounting rules have changed over time. So have disclosures, auditing, and market liquidity. The most important driver of anything tied to money is the stories people tell themselves and the preferences they have for goods and services.
They change with culture and generation. The mental trick we play on ourselves here is an over-admiration of people who have been there, done that, when it comes to money. Experiencing specific events does not necessarily qualify you to know what will happen next. In fact it rarely does, because experience leads to more overconfidence than prophetic ability. The history of money is useful for that kind of stuff. But specific trends, specific trades, specific sectors, and specific causal relationships are always a showcase of evolution in progress.
The seduction of pessimism in a world where optimism is the most reasonable stance. Part of this is natural. But pessimism about money takes a different level of allure. But mention that good times are ahead, or markets have room to run, or that a company has huge potential, and a common reaction from commentators and spectators alike is that you are either a salesman or comically aloof of risks.
One is that money is ubiquitous, so something bad happening tends to affect everyone, albeit in different ways. But a recession barreling down on the economy could impact every single person — including you, so pay attention. This goes for something as specific as the stock market: More than half of all households directly own stocks. Another is that pessimism requires action — Move! Get out! Optimism is mostly a call to stay the course and enjoy the ride.
A third is that there is a lot of money to be made in the finance industry, which — despite regulations — has attracted armies of scammers, hucksters, and truth-benders promising the moon. Most promotions of optimism, by the way, are rational. Not all, of course. But we need to understand what optimism is. Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way. The simple idea that most people wake up in the morning trying to make things a little better and more productive than wake up looking to cause trouble is the foundation of optimism.
I am a very serious possibilist. Underappreciating the power of compounding, driven by the tendency to intuitively think about exponential growth in linear terms. IBM made a 3. By the s things were moving into a few dozen megabytes. Then drives got exponentially smaller in size with more storage. A typical PC in the early s held megabytes.
Now put it together. From to we gained megabytes. From through today we gained 60 million megabytes. In Bill Gates criticized the new Gmail, wondering why anyone would need a gig of storage. Linear thinking is so much more intuitive than exponential thinking. Michael Batnick once explained it.
There are over 2, books picking apart how Warren Buffett built his fortune. There are books on economic cycles, trading strategies, and sector bets. The counterintuitiveness of compounding is responsible for the majority of disappointing trades, bad strategies, and successful investing attempts.
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Attachment to social proof in a field that demands contrarian thinking to achieve above-average results. The Berkshire Hathaway annual meeting in Omaha attracts 40, people, all of whom consider themselves contrarians. People show up at 4 am to wait in line with thousands of other people to tell each other about their lifelong commitment to not following the crowd.
Few see the irony. Anything worthwhile with money has high stakes. High stakes entail risks of being wrong and losing money. Losing money is emotional. And the desire to avoid being wrong is best countered by surrounding yourself with people who agree with you. Social proof is powerful.
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Crowds and social proof help fill those gaps, reducing doubt that you could be wrong. The problem with viewing crowds as evidence of accuracy when dealing with money is that opportunity is almost always inversely correlated with popularity. What really drives outsized returns over time is an increase in valuation multiples, and increasing valuation multiples relies on an investment getting more popular in the future — something that is always anchored by current popularity.
Very few people can do that. Embrace with both hands that, statistically, you are one of those people. An appeal to academia in a field that is governed not by clean rules but loose and unpredictable trends. Harry Markowitz won the Nobel Prize in economics for creating formulas that tell you exactly how much of your portfolio should be in stocks vs. A few years ago the Wall Street Journal asked him how, given his work, he invests his own money. He replied:.
My intention was to minimize my future regret. There are many things in academic finance that are technically right but fail to describe how people actually act in the real world. Plenty of academic finance work is useful and has pushed the industry in the right direction. But its main purpose is often intellectual stimulation and to impress other academics. We should just recognize it for what it is. Which, in the real world, no one would actually do. What works on a spreadsheet and what works at the kitchen table are ten miles apart. The disconnect here is that academics typically desire very precise rules and formulas.
But real-world people use it as a crutch to try to make sense of a messy and confusing world that, by its nature, eschews precision. Those are opposite things. You cannot explain randomness and emotion with precision and reason. People are also attracted to the titles and degrees of academics because finance is not a credential-sanctioned field like, say, medicine is. So the appearance of a Ph. D stands out. I used to park cars at a hotel. This was in the mids in Los Angeles, when real estate money flowed. I assumed that a customer driving a Ferrari was rich. Many were. At least not nearly what I assumed.
Many were mediocre successes who spent most of their money on a car.
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We tend to judge wealth by what we see. So we rely on outward appearances to gauge financial success. Instagram photos. But this is America, and one of our cherished industries is helping people fake it until they make it.