I am going to tell you a story. And when I'm finished, you'll know two of the most important things there are to know about investing.
Two 51-year-olds were comparing 401(k) notes. The first started contributing $2,500 a year when she was 21, but stopped by age 30. Still, the money continued to compound in her account. The second did not begin to save until he was 30, and then began $2,500 yearly contributions. Thus, the lady contributed a total of $22,500 over nine years, while the gentleman shelled out $62,500 over 21 years -- and both earned the market average of 10% per year.
And yet, by the time both were 51, the lady's portfolio was larger by the tune of $276,352 to $176,007. Ponder that a moment, and you'll come to realize the incredible force of time and compounding. Nine years of investing obliterates 21 years, simply because of a head start. Lesson 1: Get in the game right now, with money you won't need to touch for a decade or more.
In the latest issue of Hidden Gems, Fool co-founder Tom Gardner mentioned his ultimate goal of finding stocks that will rise two, 10, or dozens of times in value over the years. "But we won't find and enjoy any unless we're patient," he wrote. "Pity the unfortunate Wal-Mart (NYSE:WMT) or Dell Computer (NASDAQ:DELL) or ADP (NYSE:ADP) or Southwest Airlines (NYSE:LUV) or Berkshire Hathaway shareholder who, tickled by 20% gains, sold before these small caps rose another 50 to 5,000 times in value in the years or decades that followed."
In fact, each of these companies lost more than a quarter of its value at some point on its years-long road to wealth. Lesson 2: Patience with quality companies usually pays off handsomely.
Tom encourages his members to:
- Start now.
- Start small if you have to.
- Have the discipline to invest each month and a willingness to diversify broadly, especially in your first 10 years as an investor.
You can see every small-cap company Tom has recommended in Hidden Gems, as well as two dozen easy-to-understand investing lessons like the one in this article, simply by taking a 30-day free trial. There's no obligation to subscribe.
