One of the questions I often receive as soon as people learn that I work for The Motley Fool is, "How can I get started saving and investing in stocks?" Which is quickly followed by, "What stocks do you recommend investing in now?"
I always focus on the first question and my answer is always the same: "If your company offers a 401(k) plan, enroll and make sure you contribute enough to take full advantage of the company, matching funds if they are available. If not, open a brokerage account and start investing in an index fund and, eventually, a handful of stocks."
But the most important piece of information I can possibly give is at the end: "The sooner you get started the better off you'll be. Because there is no substitute for time."
It's a very simple piece of advice, and we have often written about how large an advantage time is for an individual investor, provided he or she takes advantage of it. But a few months later when I bump into the same folks who asked for advice, I often find that surprisingly few people decided to follow the advice right away.
The power of compounding
The primary reason time is an advantage for investors is because it allows for the power of compounding to take hold. Doubles, triples, and 10-baggers are all wonderful, but more often than not, it takes a few years for a double to happen. And it's not the double that makes an investor wealthy -- despite that giddy feeling we all get -- it's the fifth, 10th, or hopefully 20th double that is years away that provides the real returns. This is the reason we put the power of compounding right up front in the Basics section of the Fool School.
I'm often disappointed and, to a certain extent, frustrated that the advice I took the time to give was ignored or shelved. But I can understand that the power of compounding doesn't lend itself to the spoken word as well as it does to a chart or a graph. In this case, a picture is worth a thousand words.
Patience in buying and selling
The early bird gets the worm and other clever expressions play on our natural human instinct to act now. And in many of life's endeavors, time is of the essence. Want that new job? Chances are you'd better act quickly, because the company wants to fill that job posting as quickly as possible. Same with the cute sweater you saw at the Gap. If they don't have to discount it, they won't.
With stocks and investing, the rules of time get turned upside down. Don't like shares of Urban Outfitters
You don't have to play the numbers game
Ever look at one stock in your portfolio and thank the heavens that you're not measured quarterly on your performance? Looking at my portfolio, I see three companies -- about 20% of my portfolio -- that have taken a rather large hit in the last few weeks, including CryptoLogic
Foolish final words
The primary reason that there is no substitute for time and why time is an investor's largest advantage is the power of compounding. Investors who earn a quick double investing in a company like Starbucks
Starbucks is only one example. The same can be said for investors who have only held a company like Fastenal
Relax. Be patient. If you invest early and often in high-quality companies at fair prices, you're likely to get very wealthy by the time retirement rolls around.
Curious about solid companies that allow you to take extra advantage of time and the power of compounding by reinvesting dividends? Consider a free 30-day trial to Motley Fool Income Investor. There's no obligation to buy if you aren't completely happy.
Nathan Parmelee owns shares in CryptoLogic and Starbucks but has no financial interest in any of the other companies mentioned. You can view his profile here. The Motley Fool has an ironclad disclosure policy.