Spending less than you earn and investing the difference is the first thing that comes to mind. But a bigger deal is time. Let me show you why.

Say I turn 25, start working (late start much) but have no clue about any of these things. So, I earn and spend. A few years go by and just like that, I turn 30.

And then I get to see the light of what I missed and how much harder it just got if my goal was to retire with a million bucks by the time I turn 65.

I know, I know, I am still a spring chicken and thinking about retirement is something only old people do. But remember, I am old. I just turned 30.

Though it’s not late yet but we all know that the more we put it off, the harder it gets. How much harder?

At 30, to get to a million dollars by 65, I need to set aside 701 dollars each month assuming my money grows at 6 percent rate of return each year. That is lower than what the stock markets have historically returned but I like to assume the worst and hope for the best.

But say I delay it to 35 and now I have to save 996 dollars to get to that same goal. At 40, it is 1,443 dollars and then it’s over. I mean it gets exponentially harder.

The word exponential is important because if you noticed the top end of the bars, they tend to curve up and curve up fast. That’s exponential growth. That’s compound interest. Nothing magical but then it is.

Here’s another take on the power of time and systematic investing. And all we are talking about is a mere 100 dollars one time or 100 dollars a month for 50 years. Yes, there is a difference but setting aside 100 dollars each month is a manageable sum for literally anyone.

The difference in final wealth though between a one-time investment of 100 dollars versus investing that amount every month for 50 years at that same 6 percent…

Not even in the same galaxy.

And all you had to do was set aside a cup of Starbucks worth of change each day.

Thank you for your time.

Cover image credit – Ron Lach, Pexels

That’s not quite market timing (it is panic selling) but it usually is the outcome of investing without a plan. Why are we investing, what are we investing for and what are we investing in is super-critical to know if we have a fighting chance to stick with our investments during eventual market declines.

Because without that, without that conviction, we’ll end up making decisions that are more emotions-driven than following a blueprint on what to do when such downturns occur.

And they will recur because volatility, I mean ups and downs in the prices of stocks, is inherent with the stock market but given enough time, stocks will and do recover to reach new highs.

As they did from the last time around when stock prices dropped big. That is again a feature of how the stock markets work. 

So to give you a primer on how difficult this market timing game is, take for example the year 2020 that started off just like any other year. And then came this little virus out of nowhere and the entire world stopped. I mean no school, no restaurants, no travel. The economy suddenly literally ground to a halt.

And we know what that means. A big stock market crash. And it happened. They say it was the fastest decline in the value of businesses by the extent the stock market dropped.

But then the market recovered and that too in a matter of weeks.

But had you sold at the bottom and many people did assuming things were going to get a lot worse, well, now you have a problem. 

And that always is the big danger. I’ll get to the why later but let’s run through some numbers on why it would have been a bad idea to even attempt to time the market.

So there were 253 total trading days in the year 2020. Had you stayed invested all through the year and though not ideal, if all you owned was a large company fund like the S&P 500, yes, you would have had to live through intense volatility but you did good. I mean you made 15.29 percent on your money.

But had you sold to buy back into the market at a later point and missed the single best day, your return for the entire year would have dropped by two-thirds.

So miss just one day and your return drops from 15.29 percent to 5.40 percent. That’s crazy.

And that usually is the most likely outcome if you were to attempt this market timing thingy since you’d always tend to get out at the worst possible days and the worst possible days are almost always followed by the best recovery days.

The best days are again lumped together and had you missed the best two days, you might just have been better off keeping your money safe in a savings account. Because missing just two of the best days turned a positive year into a negative one.

The plots below show all this in percent and dollar terms so don’t market time.

But why show missing only the best days? What would it look like if I were to miss the worst days of the year?

Fair question and you’d be right. You’d have quite a bit more money if you were able to somehow navigate out of the market before the worst possible days and were somehow able to get back in time to enjoy the recovery.

And the data that shows just that.

But we all know how hard that is. I mean the math is plain impossible. Let me show you why.

So there were 253 trading days in the entirety of the year. Your chance of missing the single worst day is of course 1/253 = 0.004 or 0.4 percent. Not only are your odds low but even if you timed it perfectly, it’s not like you made the kind of killing that would have changed your life.

Missing the two worst days brought you quite a bit more money but then your chance of successfully pulling that off is 1/253 x 1/252 = teensy tiny small. You might as well play the lottery.

And of course being able to time the market that lets you avoid all five of the worst days are out of the world remote.

So don’t market time.

And all this ignores tax consequences and all that time you’ll spend away from what you are good at, constantly watching the markets and the emotional heartaches that’ll bring you. Because trust me (my dad), this thing can be quite draining.

So again, don’t market time.

And the same plays out over longer timeframes.

Miss the 20 best days out of thousands over this 15-year stretch and you might just have parked your money under your mattress.

And here’s the biggest problem with market timing. Say you sell at the worst possible times thinking that things would get even more worse and they do, there is almost no chance you’d be willing to pull the trigger to get back into the game because then you’d wait for things to get even more worse.

So you wait and out of nowhere, the market turns and turn it does violently. That is what always happens. And now it goes past the point you sold at.

Now you are stuck, hoping and praying it (the stock market) falls again. And it never does. Because stocks as a collection are inherently designed to rise in the long run. They must. That’s the nature of the game.

So again, don’t market time. Don’t give up on the guaranteed returns that the global stock markets will deliver over time for that fake allure of being able to dance in and out of the markets.

And the best way to protect against caving to that lure of market timing is to follow a plan. Any plan, regardless of how sub-optimal it might appear to be is better than no plan. And then come hell or high water, stick to that plan.

I bet you’d come out a-okay.

Thank you for reading.

Cover image credit – Monstera, Pexels

Say you are 20 years old today and you invest a dollar at say 8% annual rate of return and leave it invested till you are 65. What would that dollar become? 34 dollars.

But say for some reason you waited till you were 30. So instead of the thirty-four dollars before, you’d have less than half of that or about sixteen dollars. Wait another 10 years to invest and you’d have a mere $7. Wait till you are 50 and you’ll have just $3 at age 65. Another ten years and it’s over.

So start early.

But of course a few tens of dollars will not change anything for you. You need more, a lot more to meet goals that are much bigger than what a few dollars can provide. We hear all the time about what you have to do to become a millionaire. But that is so last century. I’ll revise that to how to become a multi-millionaire.

Or at least a double millionaire. And say that is the goal. And you want to get there as fast as possible because you don’t have a lot of time. You’ve got just one life and you have many things you probably want to do with it than just think about money.

So say you are fresh out of college and you are fortunate enough to be making a great income. What’s a great income? How about $100,000 a year.

I know it sounds big but I see and hear that a lot of college graduates make that kind of money nowadays, at least in the Silicon Valley that I live in.

So say you take $10,000 of what you make each year and are able to invest that at 6%.

Oh wait, why 6%?

Yes, I did talk about 8% before but remember what we are trying to do here – we are planning for the worst and hoping for the best.

So let’s plan for our $2,000,000 goal assuming a 6% rate of return and $10,000 of annual savings.

And this is how it looks…

So 44 long years to get to that goal. That is way too long.

Can you speed that up? Yes, but it doesn’t come easy because that requires you to save more.

But I say it’s doable because you are making great income. All that’s needed is a little bit of discipline and expense management. It’s your life we are talking about here after all.

So here are four scenarios with four different saving amounts…

So going from saving $10,000 a year to $25,000 drops the number of years to reach your goal by almost 14 years. That is a lot of life you are getting to buy just because you were able to squirrel away more.

But what if you could earn a higher rate of return, say 8%. Now this is an aggressive assumption and it is completely possible but I wouldn’t count on it. But what would that do to your time scale?

So of course, you get to your goal faster because the rate of return is higher but did you notice that the gap in years between saving $10,000 vs. saving $25,000 is not as wide anymore?

Maybe it’s not as evident so let’s try two more rates of returns – 10% and 12%. I would definitely not count on that kind of a rate of returns for the near future but let’s just see.

So as the rate of return increases, the effectiveness of saving more decreases. And that makes sense. With a lower rate of return, the amount you save is a bigger proportion of the total accumulated wealth, especially in the early years as shown below.

But with a 12% rate of return, the proportion of total wealth that comes from pure savings drops at a much quicker rate with growth taking over. So you don’t have to try as hard. I mean you don’t have to scrimp and save but I hope it is not a sacrifice.

But we know that we are supposed to plan for the worst and hope for the best so with that in mind, what if you want to reach your goal in the same number of years as 12% rate of return does but assuming only a 6% rate of return? You can but you just have to save more as shown below.

So like before, the saving component is a bigger contributor to your total wealth. And you didn’t have to try as hard. I mean you didn’t have to take undue amount of risks to avail of that mystical 12% rate of return. For each and every year. For decades. 

All you had to do is save more which is a much safer bet. And $25,000 a year might feel tough in the initial years but over time, as you grow and as your income grows, it gets easier and easier.

That’s about it.

Thank you for reading.

Cover image credit – Anna Shvets, Pexels

Spreading your money into different types of investments to reduce risk of you losing your money when you need it the most. When picking out an asset mix, you want to choose investments in the right proportion that maximizes return while controlling for risk. That describes asset allocation.

Stocks, bonds and cash are the common components that make up an asset mix. And depending upon how much time you have to retire, that asset mix could look something like shown below.

How do they decide on the mix? Fluctuation in the value of a portfolio is a key part of choosing an asset mix. Stocks fluctuate a lot more than bonds or cash, but they tend to make the most over time. Bonds don’t fluctuate as much as stocks and cash is just cash. It stays the same. 

And if you look at the plot above, you see a pattern. The more years you are away from retirement, the more stocks you own. Then why not buy more stocks when you are in retirement? Keep in mind that stocks tend to drop more frequently so when you need the money to live on, you might be forced to sell stocks at a low point. And once you sell and when eventually stocks recover, you will not participate in the recovery. And that is why you also own bonds and cash.

So that’s asset allocation.

Thank you for reading.

Cover image credit – Andrea Piacquadio, Pexels

So starting out this weekend morning, I woke up and went downstairs to do the first thing I was supposed to do. And that is to brush my teeth. I use Crest toothpaste. Who makes that? Proctor and Gamble (P&G). You can buy shares in that and become an owner of that company. I am one, a teensy-tiny owner but still an owner. I then ate breakfast that my mom made. And no company out there can make the kind of breakfast like my mom does so too bad. I then drink water out of my Hydroflask. That’s made by Helen of Troy. And guess what, that one is also publicly-traded and I own shares in that one too. I also play with lots of Lego. Because I love playing with them, I thought maybe I should also buy a stake in that business. But unfortunately, I can’t because the company that makes Lego is privately-owned.

A privately-owned business does not trade on the stock exchange whereas a public-traded one does. So you can buy shares in a publicly-traded business and become a part-owner of that business but you can’t with a private company. Or let me just say that it is not easy to buy a share in a private company but if you really, really want, you could. But not easy.

Anyway, let’s get back to my Sunday. I read a lot. Mostly paper books but sometimes on my Kindle. The Kindle is an Amazon product. Amazon is a publicly-traded business so I also own a very, very, very small piece of Amazon. The paper that was used to make the paper books I read likely came from the International Paper Company. It is the largest paper producer in the world and guess what? It is publicly-traded as well and I own stock in that too. You can use the words shares and stocks interchangeably but they mean the same thing.

And there are companies that make the ink and the metal that make up the printing machines that are used to make those paper books. There are also companies that ship those books around the world. Most of them, if they are publicly-traded, I likely own.

A few hours later, I ate my lunch. The ingredients were from Trader Joe’s which is a private company so I can’t own shares in that company. After lunch, I would often spend some time drawing and I use Microsoft Surface Book for that. And of course I own shares in Microsoft.

I do some math worksheets after that and as a reward, I get to play outside later in the evening. I wear my Adidas hand-me down jacket that my sister used to wear before me. I don’t like that part as much but then again, it is almost like new. Plus it saves money and of course, don’t forget the environment. I put on my Nike shoes and then go outside to play with my neighbors. And I own shares in both.

I come back and wash my hands with a soap brand called Soft Soap. That’s made by Colgate-Palmolive which also makes toothpaste that most of us probably have used at one point or the other. I own shares in that too.

But that was not the end of my day yet. I eat homemade food for dinner. Then I take my shower and I use Dove shampoo and soap. Dove is made by Unilever. I use a conditioner brand called Pantene that comes from P&G. And…you know what I was about to write, don’t you?

Then it’s bedtime.

I also wrote this on Google docs which is part of Google. I own shares in that too.

So that was my day. And now you know about all the products I used that day. And you also know about the businesses that make these products and the fact that I own shares in most of them.

So can you.

And if you think it takes a lot of money to become a shareholder in these wonderful businesses, it doesn’t.

Thank you for reading.

Cover image credit – Oleg Magni, Pexels

It’s been a little while since I’ve had that toy and I don’t love it anymore. It’s lying somewhere unloved and uncared for in my home. And we know the problem with fluffy toys. They collect dust. And dust means allergies. Plus spiders love to build their homes in it. Or on it. And I am terrified of spiders. So those are some very good reasons I should have thought twice before splurging my cash on that toy. Or any toy that I know I would throw away in a very short time.

Buying stuff we don’t need is one thing but what happens over time when we keep on buying things? It creates clutter in our homes. And no one likes clutter, especially my mom. So what does she do? She goes around the house and collects all the things that I don’t use anymore. She throws away the toys that are falling apart and donates the rest. But a lot of the toys eventually end up in trash. And since most of what we buy is made from harmful chemicals, the stuff that ends up in trash will remain on our planet for many, many centuries. If that toy ever ends up in the ocean, an animal could think it was food and eat it. It could die. So all bad.

The toy of course was not free. It cost a lot of money. My money. Plus my dad usually doubles the amount what I don’t spend and instead deposit in my savings account. So that toy actually cost me 60 dollars.

But could I have done something better. Like invest that money? By that I mean buying shares in a company that is in the business of making our world better. What if that investment earned 10% a year? What would that 60 dollars be in say a decade? 155 dollars. How did I know that? My sister wrote about this thing called the Rule of 72 and that’s how I found out. And it’s all about COMPOUND INTEREST where money makes money on money and that money makes more money on money. If you’re wondering how compound interest works, the formula below is one easy way to understand. That formula,

FV = PV (1+r)^t

where,

FV is the future value

PV is the present value

r is the rate of return

And t is the time in years.

So in this scenario, if we plug $60 for PV, 10 years for t because a decade is ten years, and 0.1 for r, we get about $155 for the FV.

Here’s an easier way to understand. Let’s say I have a hundred dollars and I didn’t know what to do with it so I invested it in my savings account that earns 10%. One year later, I look at my account and I have 110 dollars. All I did was leave my money there and it became ten dollars more. That’s because I earned interest. And if I leave that money invested, another year from now, I will have $121. Not $120. That is a dollar more and that is because of compound interest.

That 60 dollars that I in a way spent on that toy, guess how much would it grow to in 50 years at 10% a year? How about 7,000 dollars. Really. And that is a lot of money to spend on a toy that I hardly played with.

So these are some of the reasons why we shouldn’t be buying things we don’t need.

Thank you for reading. I’ll write more.

Cover image credit: Alena Koval