Time: It's How Savvy Investors Build True Wealth

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Most investors think of time as an enemy, a predator that stalks them all of their lives. They never feel they have enough of it so they are constantly trying to outwit it.

Trying to beat time, they become irrational and make unpredictable, impulsive decisions to "get ahead" or hit the proverbial "home run."

Or, worse they pretend they have all the time in world and do nothing with it.

Later they find themselves playing a costly game of catch-up they cannot possibly hope to win without taking huge risks.

Unfortunately, that's exactly where many investors find themselves today. They are sitting on the sidelines faced with the daunting task of making up the time they'll never get back.

As a seasoned investor, I prefer to think of time as a constant companion– one that is willing to work with me every day if I harness it properly.

Rather than trying to cheat it, I work with it so that I tip the scales in my favor. This ensures that time becomes my ally rather than my enemy.

It's What You Don't Know About Time That Kills Your Returns

Let me illustrate.

Which action do you think will earn you more money over the next 20 years?

  • Investing $12,000 in a single lump sum today; or
  • Investing a total of $24,000 in increments of $100 a month?

Most people chose b – investing $24,000 in increments of $100 a month.

And for one highly logical reason – you would be investing two-times more principal.

The truth, though, is that putting away $12,000 right now is actually the more profitable choice.

We have been conditioned to put a little away each month on the assumption that this will add up over time. But that's only half the story.

What investors really need to do is consciously put aside as much money as they can as soon as they can – then make sure it earns a decent rate of return for as long as possible.

There's no hocus-pocus here.

It really is as simple as that, no matter what future market conditions may hold, no matter what happens with the elections, our debt, Europe, a hard landing in China, or even aliens landing.

The single most important investment decision you can make today is to put time on your side.

Consider the following example.

At 5% a year, the person who chooses to invest $100 a month will be ahead of the lump sum investor 20 years out. But if both investors manage to obtain 10% per year over 20 years (high I know but hang with me for illustrative purposes) the tables turn and the lump sum investor ends up being 6.78% ahead over time.

At higher rates of return, the difference becomes even more pronounced.

At 20%, for example, the lump sum investor would have a healthy $460,051 versus the $268,830 the $100 a month investor would accumulate.

And just in case this is not setting off a huge obnoxious alarm bell in your head, let me put it another way with one of my favorite examples.

In 1626, we bought Manhattan Island from the Indians for a whopping $24 worth of beads and trinkets. History suggests the Indians got the short end of the deal.

Factor in time and interest, and that's not entirely the case.

If the Indians had invested that same amount at 7% a year, which is not unreasonable over long periods of time, they'd have $1,561,138,484,403.65 today which, incidentally, is not all that far off from the total estimated value of all the land in Manhattan.

The message here is clear: you don't have to start with massive amounts of money to become wealthy.

In fact, you can start with unbelievably small amounts. But you have got to start. You cannot worry about what might happen.

Don't have 386 years to wait like the Indians did or think 7% a year compounded is impossibly high?

No problem. How about if all you have is 12 years?

Chances are good that if you're reading this column, you've been investing for at least that long.

Had you put your money into Altria (NYSE: MO) on December 31, 1999, your total return would be a healthy 1,011.07%. Divided by 12, that's roughly 84.25% a year including dividends and reinvestment.

A similar investment with McDonald's (NYSE: MCD) returned 215.71% over the same time period or roughly 17.97% a year, also including dividends and reinvestment.

My point is time matters and if you're getting paid to play, it can be a powerful way to build true wealth.

Three Ways to Build True Wealth

Here are three of my favorite wealth builders at the moment:

Altria Group Inc (NYSE: MO): The company, through its subsidiaries, manufactures and sells cigarettes, smokeless products and wine. The company also manages a portfolio of leveraged and direct finance leases. Adjusted for splits, Altria has increased its annual dividend 292% since 1989. The company is currently yielding 5.50%.

Linn Energy LLC (Nasdaq: LINE): Linn Energy engages in the acquisition and development of oil and gas properties in Mid-Continent, the Perriman Basin, Michigan, and California, and the Williston Basin in the United States. As of Dec 31, 2011, the company reported operating 7,759 gross productive wells and has proved reserves of 3,370 billion cubic feet equivalent of oil and gas, and natural gas liquids. Since its IPO in January 2006, LINN has consistently paid a distribution each quarter and has increased its quarterly dividend by approximately 115%. Linn is currently yielding 7.2%.

McDonalds Corp (NYSE: MCD): McDonald's operates 33,000 restaurants in 119 countries serving nearly 68 million people every day. The company has raised its dividend every year since paying its first dividend in 1976. Adjusted for splits and dividends (using data supplied by Yahoo Finance) the company has returned 44,322% (from $0.22 to $97.73) since 1970. McDonald's is currently yielding 2.9%.

All it takes is that crucial first step. Use your time wisely.

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About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

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  1. Hoops | March 22, 2012

    Your example about investing a lump sum vs.100 dollars a month is faulty.It depends when you invest the lump sum.Try your example investing the lump sum in Jan 2008.I think you are being irresponsible advising people against dollar cost avgeraging.A small amount is no big deal but what about a 65 year old with 300k to live on and he takes your advice and invests it at a terrible time???

  2. Jim gentile | March 22, 2012

    Your theory is too simplistic. Run your senarios starting in August of 1987, or March of 2000 or September of 2007, to name the obvious ones and the $100 a month will most likely do better. I will give you a current senario. , start in May of this year and we see how that works out. Investing over a period of time makes one feel better when the market tanks because you are buying cheaper shares and are less likly to be spooked out in a severe downturn, thinking you made the wrong decision. One other point is if the market conviently went up 8%-10% every year like clockwork we would all be rich. Backtesting the markets and coming up with say 8-10% over 100 years is foolish because you REAL return is ALWAYS lower than that due to the selloffs (50% loss needs 100% to get back to even).

    Jim Gentile
    CFP

  3. Darryl Hanson | March 22, 2012

    The recommended stocks are expensive. What can one do about that with only $40, 000 to play with.

    • Edmund Klebe | March 22, 2012

      Darryl: divide it equally as possible, reinvest all dividends, sit back and enjoy.

  4. Ryan | March 22, 2012

    The premise of the two propositions with no qualifications as to returns is very faulty.

    At 0% returns, proposition b obviously returns more than proposition a ($24,000 vs $12,000). I t takes 5% non-compounded for proposition a to return the $24,000 of principal in propsition b, however the monthly sums in proposition b would have, with the same 5% simple interest, returned $30,000. Obviously compounding changes things. By my calculations, the $12,000 with monthly compounding will equal $24,000 with an approximate 3.5% interest rate after 240 months.

  5. db | March 23, 2012

    The other part is how blithely Mr. Fitz-Gerald assumes we can come up with $12 grand. $100/month, I can manage.

    I'd also suggest KO for long term investment.

  6. Nestor | March 23, 2012

    I agree with some of the comments. Lump sum investing can appear to be more beneficial, but as an Economist I can tell you that what $10,000 dollars represent today, won't represent the same thing in 10 years. Depreciation and other factors like inflation and falling interest rates and such, can decimate projections for a lump sum investment. This can work if a person has, say, 30 or 40 years where they figure they won't be touching the money. For an average investor, the best way to go is to set monthly sums that can be deposited toward investing, and then add on lump sums every now and then when cash isn't limited. The true secret is to keep debt manageable and then think about investing disposable cash into safe investments. The kind that yield modest returns, but that are a sure thing.

  7. Ennio Florio | March 23, 2012

    time to get started was yesterday or last year, never to early to start,i start to invest with MCD in 1996 100 dollar a month today I own 750 shares,I wish I had bot 100 shares or started with 200 a month,I started my grandchildren Nick and Alyssa 14&11 with mcd,wtr,p&g,mck,mo &more,I hope that they will contribute some on each stock for the next 30 or 40 years and they will retire rich. Get started NOW.Ennio Florio,Ormond Beach FL.

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