Let Me Tell You About Patience

By Joe Ponzio on July 12, 2007  |  7 comments

One thing that Wall Street wants you to believe is that you have to get your money into the markets today—or you are never going to retire the way you hope to. Why? How else will they get you to buy their investments today?

In reality, you have time. You absolutely have to start saving money today, but you do not need to get it into the markets just because you have it. Let me explain:

For our purposes, let's assume that a Wall Street mutual fund will grow at 7% on average for the next ten and twenty years—a fair assumption. Let's also say that a diversified portfolio of dividend-paying stocks will grow at 11%. Finally, let's say that buying wonderful businesses at a discount to their true value will grow at 15%.

Don't worry, I'm not going to get technical on you. Let's just add one more assumption—money markets or savings accounts will pay you 5% a year so long as your money is in cash and not invested in mutual funds or stocks.

In Ten Years

Investing today and growing at 7% a year, $10,000 in the Wall Street mutual fund would grow to $19,672 at the end of ten years. Now the question—when would you have to buy your diversified portfolio of stocks or your wonderful businesses to end up with $19,672 or more after ten years?

The Diversified Basket of Dividend Stocks: If your basket of stocks grew at 11%, you could leave your money in cash, earning interest, for six full years. Then, you could buy your basket of stocks, hold them for another four years, and end up with $20,344 after the full ten years. You would still be ahead of the mutual fund and you would have waited six years for the right opportunity.

Wonderful Businesses, On Sale: What about the idea of owning wonderful businesses at bargain prices? How about sitting on cash for more than seven years? If you did nothing with your cash for more than seven years, then bought a wonderful business that grew 15% a year for the next two (and a few months), you would still end up with $21,400—more than both other situations.

That Difference Is Real, Tangible

Take that same situation and stretch it out over thirty years, and you have some gigantic differences. Your mutual funds would be worth $76,123. A diversified basket of stocks would be worth $164,016. Wonderful businesses? Try $350,248.

Cute. But $350,000 Won't Fund My Retirement

That's right. And that is exactly why you need to start saving today—even if you can't find an opportunity to buy a wonderful business for the next seven years. You need to start socking away the cash now so that you can pounce on an opportunity when it presents itself.

Of course, it shouldn't take you seven years to find a wonderful business selling at a discount. The markets tend to move in 3- and 4-year cycles. That means that they tend to go from overpriced to underpriced every three or four years - and everywhere in between. That also means that you will find yourself with one or two great opportunities every two or three years.

Let's Look At A Scenario

Let's say you don't have anything saved up right now. Maybe you have a 401k or a brokerage account, but I'm going to play the devil's advocate for everyone out there. If you do have savings, the following example simply compounds.

Okay. So you have nothing saved up. But, you can start putting $150 a month into a brokerage account paying 5% interest. In addition, you can increase your savings by 5% every year. Finally, it takes you two years to find one perfect opportunity. The rest of the time, you are simply enjoying life—ignoring the daily silliness of the stock markets.

So you start saving today. Nothing happens for two years—but you earn some interest. Then, opportunity knocks. You find a wonderful business at a discount. You have $3,901 in your money market so you round it to the nearest hundred and buy $3,900 of your wonderful company.

Two years later, you do it again—this time with the $4,300 you have in savings. I'll spare you the play-by-play—after 30 years, you are sitting on $1.3 million and some 15 wonderful businesses. Ten years after that (and probably well into your retirement by then), you'd have more than $6 million.

All with very little work, very little risk, and not a whole lot of money. How much better can it get?

But I Don't Have 30 Years To Save!

Maybe not. Though you likely have 30 years or more to invest (you'll need your investments to grow straight through your retirement), you may not have 30 years to invest. The only thing that changes is that you have to save more each month.

If you did the exact same thing as above, waiting for that perfect opportunity and then concentrating your cash into it, but started by saving $500 a month, you'd have about $2 million in 25 years. At $1,000 a month, you'd have $1.8 million in 20 years—and $8.8 million by year 30!

I Need More...Sooner

The reality is that it probably isn't going to happen. You need to work with what you've got. If you've been so burned by Wall Street's "advice" that you are now behind the 8-ball, you have to play catch-up...without gambling.

You have two choices—gamble more and hope you can beat the professionals, or save more. One thing I would recommend is to take control of your 401k. Your 401k plan is likely your largest savings account. If you can buy wonderful businesses in it, do it! If not, talk to your plan administrator about being able to add that feature or add a "Separate Account" feature.

Going Full Circle

Where will that 7% mutual fund get you in 30 years—even if you are investing $150 a month and increasing it 5% a year? $317,724—nearly $1 million less than you should have had. But hey, you were diversified.

Also Filed Under "How to Think About Investing"

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• Mohnish: On Noise, Emotion, Gold And Change
• Have You Read Buffett?
• The Art of Selling Your Stocks