Yes, it is. And time is on your side, too, when it comes to building wealth.
More than you probably know.
There are three ingredients in building wealth: savings, time, and returns. All three are vital. If one of the three doesn’t pull its weight, the result on wealth can be dramatic.
The power of savings and returns are, I think, relatively well understood by most people. The time component is not difficult to understand, but I do not believe it is appreciated nearly enough. Time can do amazing things to money.
A simple thought exercise proves this point.
Let’s say you are 20 years old. You have a wealthy uncle who dies and leaves you $50,000. After contemplating purchasing a sports car, you make the less-fun but more-mature decision to invest the money instead. You open an investment account and put the money into the stock market.
Then you forget about it.
Twenty years later, at age 40, you remember the account and decide to look up its value. To your delight, the $50,000 has grown to more than $230,000, a return of about 8% a year. Not bad.
But what happens if you let it ride another 20 years and get roughly the same investment results?
At age 60, you check your account balance, and you can hardly believe it. Your $50,000 is now worth just over $1 million! The only work on your part to achieve this result has been to sit on your hands. It seems almost too good to be true.
But what happens if you let it ride yet another 20 years?
Now you are 80 years old. You have left the investment account alone for 60 years. While you were living your life, the account continued to notch investment gains. Not every year. Some years the account lost value. In some years, those losses amount to nearly half your account. But you never sold. You just hung on.
When you opened your account statement on your 80th birthday, you nearly fell out of your chair.
You checked the balanced. And then checked it again. You rubbed your eyes and squinted hard to make sure you were reading the numbers correctly. For a moment, you wondered if someone had made a mistake and placed the decimal in the wrong spot. After all, how could you have $5 million?
Think about that. And then think about this: Your investment gains alone in the last five years – $1.6 million – were more than your entire account balance for the first 38 years of owning the account.
Time can do wonders.
Financial writer Morgan Housel demonstrated this concept with the legendary investor Warren Buffett. Housel acknowledged Buffett has achieved a tremendous investing track record – no secret to anyone. What is often misunderstood, according to Housel, is that Buffett not only masterfully produced eye-popping returns, but he also took advantage of time.
According to Housel’s calculations, 97% of Buffett’s $81 billion in net worth was accumulated after he qualified for Social Security benefits in his mid-60s. Buffett was a great investor long before then, but it takes time for time to do its thing.
I witness this all the time when speaking with people in or approaching retirement. Often, they tell me, “I would have never guessed we would have this much money. And it just keeps rolling in. It is amazing!”
They worked hard, saved diligently, and invested prudently. They knew these things would eventually pay off. And they did. And then, time sprinkled some extra magic on the process.
Time can work wonders, if we just let it.