Time is Money. You’ve heard it a million times already, but most often it is applied to a different context rather than in investments.
When it comes to investing time is also money. And that the earlier you start investing, the better chances that your money grows. Before I discuss the importance of time, allow me to touch on the concept of timing as it applies to investing.
So what is timing? What’s the difference between time and timing?
You probably know by now that when you invest in stocks, you are buying shares in the company. In the Philippine Stock Exchange (PSE), stocks are bought in monetary units called Net Asset Value Per Share or NAVPS. The prices of stocks that are traded in the PSE change in value almost every single minute. Market Timers are investors who would attempt to buy stocks when they see that the price is going down then sell when the price goes up.
When investing in a mutual fund, you are also buying shares in the mutual fund company. But unlike traded stocks, shares in a mutual fund remain constant throughout any given day. When buying share in a mutual fund, Market Timers would look for any downward pattern in the performance of the fund and then they decide to buy hoping that it will rise again in value some other time in the future. And then when the value of the fund indeed rise, they would unload their shareholdings to take some profits.
To a beginning investor — and to the gambler — it would appear that Marketing Timing makes a lot of sense. That is, you buy low and then sell high. That’s how money is made in investing, right?
Well, partly it’s right… some people still believe in luck. But most often Market Timing is just dead wrong. And not only that it’s wrong — it’s also impossible to do.
Please allow me to quote some words from the giants in the investment industry and what they have to say about market timing:
“Don’t try to buy at the bottom and sell at the top. It can’t be done, except by liars.”
“Market timing is impossible to perfect.”
“I can’t recall ever once having seen the name of a market timer on Forbes’ annual list of the richest people in the world. If it were truly possible to predict corrections, you’d think somebody would have made billions by doing it.”
“After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently.”
— John Bogle
If I haven’t convinced you yet that market timing is a lie, I hope those financial gurus do.
But really, far better than timing the market is having invested in the market.
The 3 Reasons Why Time is the Key to Success In Investing
1. Time Makes Compounding Of Interest Possible
Compound Interest means interest earning interest, earning even more interest… ad infinitum.
When you put money in the bank — in a savings deposit — you’re making your money compound over time… no matter how small that interest may be.
When you invest money in a mutual fund — and you are investing for the long term — you are also putting the power of compounding to work. Meaning if you don’t take out any profits earned by the fund, you are essentially re-investing it back. The fund can use it to buy more stocks or more bonds and this means more earnings for you and the other investors in the fund.
Compounding is another way of saying you let your money work for you instead of you working for money.
2. Time Reduces Risks And Increases Return Potential
Which of the following investments pose the highest risk?
- Corporate Bonds
- Treasury Bills
If you say stocks, you are correct. If your answer is Treasury Bills you are also correct. Bonds may also be the most risky of the three.
Am I crazy? How could it be that they are all equally risky?
Well, when assessing risk, you also have to factor in your time horizon. In other words, how long do you want to stay invested before taking the money out?
If you are planning to invest now and you plan to use the money next month in case there is an emergency, by all means you should avoid exposing your money to stocks. Equities are too volatile to be gambling that way. A Money Market Fund — invested mostly in short-term debt instruments like T-Bills and Cash Equivalents — is the right place to park that money.
If, however, you don’t want to touch your investment money until you retire in 40 years time, investing it in Money Market Fund means you are exposing it to some undue risk of not maximizing its earning potential. That means lost of opportunity for your money to grow.
In other words, stocks are risky in the short-term. But if you stretch your time horizon — say, 30 years – it’s been proven historially that stocks, compared to other investments, offer the most bang for your money. Stocks could just be only investment that can help you achieve your long-term finacial goal.
Take a look at the graph below showing the 30-day performance of the First Metro Save and Learn Equity Fund ending 04-Dec-2014
Very risky, right?
Now, try to look at the performance of the same Equity Fund over the span of 5 years ending December 4, 2014.
Now, that’s quite comforting especially knowing that your money indeed grows in the long run.
The graph is taken from Bloomberg.com.
3. Time Makes Making Mistakes Cheaper
Did you know that it is cheaper to make mistakes while you are younger than when you are already older?
I have a friend who is a Recruitment Officer for a local Call Center in Davao, Philippines. I once asked her why call center companies have very high employment turn-over rate. That is, they are always hiring and they are always firing also. 🙂
She gave various explanations, but what struck me the most is this: they do have some very loyal employees. And they are ones who are either already married or have children.
I think it’s just commonsense. You don’t have to attend The Harvard University to realize that the moment you have kids who are dependent on your income, the more likely you are to stay conservative — as opposed to being aggressive — with your career moves.
It’s your commonsense telling you to slow down.
The same concept holds true in investing. You can afford to take risk while you are young. You don’t mind if the economy goes down the tank, because you know that tomorrow it will rise up again possibly with an even greater come back.
The other advantage of starting at a young age is you learn more and more as time goes. You’ll discover what works and what doesn’t.
Having that attitude when your Retirement Days are fast approaching means you could be losing your pants when that time finally comes.
So, being young — or rather, starting young — indeed offers a lot of advantages when it comes to investing.
That’s why as parents, the best time to save up for your kids College Fund is the day they were born.
And when is the best time to save for retirement? That’s for you to answer.
Don’t Worry, Make Money
One of my favorite books written about money is the one entitled, “Don’t Worry Make Money.” It’s authord by Richard Carlson, the same guy who wrote the best selling book “Don’t Sweat the Small Stuff.”
I find that book so delightful to read especially that it was written by a psychologist and not by a financial professional. There is no doubt in my mind that I’m getting an unbiased opinion on the subject of money. I just know he will not be selling me any kind of Investment Newsletters. 🙂
I encourage you to get that book as a gift to someone or as addition to your bookshelf collection.
There’s one chapter of that book that I really like bears this title: “Don’t Worry About the Market – Invest In It.” That part of the book talks about investing in the Stock Market and having a long term view when doing it. And Richard has this advice for his readers:
Once you commit to the “don’t worry” attitude, you’ll chuckle as you notice how many people worry, every day, unncessarily, over which direction the market is moving…
What is there to worry about? By implementing the “pay yourself first” strategy, by investing a predetermined percentage… you will guarantee that, over time, you’ll amass a small fortune. You simply put the money in, month after month, and leave it there.
That’s a good attitude that you need to develop as an investor.
And of course, as a mutual fund investor myself, I always remind myself of the wisdom of that approach to investing.
It makes a lot of sense. And it works.