Time is your greatest investing partner, but its value can be overlooked. Passive and quiet, this partner won’t bang on your door and say it’s time to get started, that part is up to you. But slowly and quietly this partner will start doing some of the investment lifting for you and before you know it your contributions are no longer the most important. Investing is easy once you understand the fundamentals, and using time to your advantage is one of them.
The Philosophy
There is always a reason not to start investing. The war in Ukraine, the reversal of globalization, pending recession, rising cost of living – the list goes on. A quick review of history shows that there is always something happening, and they are beyond our control. What is within our control is to start investing on our next pay by setting money aside. The philosophy here is that investing is a natural system that requires seeds, just like farming. Your seeds are your pay-to-pay contributions that get put to work in capital markets to start generating investment income, dividends and capital gains. Like farming, with investing you need to be patient. You can’t plant the seeds in the spring and run into the fields mid summer and shout grow crops, grow. Your silent partner time will take over and produce a harvest in the fall. The benefits of starting to invest now, however old you are, is that the money you set aside will not be missed once you adjust. Pay yourself first is a well covered fundamental of investing that starts the journey and slowly engages your silent partner.
The Math
Long term investing has a lifecycle. The ever important first contribution, accumulation, portfolio fine tuning in mid-life and then eventually de-accumulation. In the first stage of our investing lifecycle of accumulation, when we are probably most vulnerable to our doubts, we can’t be blamed for thinking in linear growth. In other words, our year over year portfolio growth is roughly in-line with our own contributions + or – market returns. This is because our passive and quiet partner is just getting started. The seeds of our portfolio at first are our contributions, and then the seeds of our partner are re-invested income, dividends and capital gains. The difference is our contributions are mostly linear while the contributions of our passive partner are exponential. This is the magic of compounding returns, and the longer the time horizon, the stronger the impact of compounding. Put simply, start your investing journey as soon as you can to engage your silent partner, time.
The first milestone you can set in your journey is the point at which your contributions annually are the same as the total of your annual investment income, dividends and capital gains. After that you can expect, via compounding, that your passive partner will start to do the heavy lifting. All investors and their portfolios are different, but you can expect this first milestone to take at least 10 years, so get started!
The Shock Absorber
Once you have built a decent size portfolio and are exposed to capital market mood swings, you are going to learn the cost of superior long-term returns – living with volatility! Warren Buffet has described the stock market as a manic depressive. And the simple reality is that as you take on more risk, there is usually more volatility. Once again, time is your greatest partner. If you have a longer-term perspective, you will begin to see the downs as the inevitable price to pay and an opportunity to add to positions. You will also begin to learn not to get too caught-up in excessive-run ups, it is great on paper but sometimes markets overshoot on the way up. Time has a way of smoothing out these bumps. A concept that is good to learn and keep in mind is “reversion to the mean”. Simply put, big swings in the markets in either direction happen, but eventually the prices revert to their long-term return profile. In the short-term capital markets are a voting mechanism, in the longer run they are a valuation mechanism. Good examples of this include euphoria that erupts when central banks unexpectedly reduce interest rates, or an inflation report comes in lower that expected. Or doom that happens when the world discovered COVID. All meaningful events, but they often create over-shoots in the market that eventually revert back. Your silent partner helps you through this by smoothing out the ride over time.
In investing, just like in life, there are only a few true fundamentals. Our job as investors is to learn what they are and make sure we are leveraging them. The greatest moment in an investing career is the moment a new investor starts with the first dollar. You have gone from zero to something – an incredible first and important step. After that, we get introduced to our quiet, passive partner time that helps us learn, ride through the bumps, and create real momentum as compounding takes hold. Seize the day and start now.
References:
https://www.justetf.com/en/news/passive-investing/why-time-is-all-important-when-investing.html
https://www.investopedia.com/terms/m/meanreversion.asp
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