There is both myth and magic when it comes to investing your money for retirement. The myths can be beliefs we hold, learned from our past. The magic can be smart strategies people use to grow wealth.
Your own investing is likely to be in your retirement funds—an IRA or employer retirement plan. What you do with those funds can spell the difference between catching the hen that laid the golden egg or feeling like the poor Cinderella.
I love fairy tales. When I was a little girl, I read every book of Grimms’ Fairy Tales, absorbing lessons about human behavior and life through the magic of story-telling. Now, as a retirement planner, I see how some of these tales still hold the power to instruct, even on the topic of personal finance.
How? These stories teach important values, like constancy and fidelity, moral courage, or the power of the small to make a big impact. How does this relate to investing? Let’s explore with a story.
The tortoise and the hare fable is a good example of how slow and steady wins the race. In the fable, the tortoise and a hare (rabbit) made a bet on which one would be the first to cross a finish line a few miles away. The hare was cocky because he knew he was ten times faster. Both started the race at the same time. The tortoise plodded along, slowly but steadily putting one foot in front of the other and never stopping.
The hare, on the other hand, raced ahead, leading by a wide margin, then stopped to indulge in breaks, or got distracted. On one of these breaks, he fell into a nap. The steady tortoise finally passed him dozing under a bush, and crossed the finish line first to win.
The hare lost this race because he only ran when he felt like it—and the running looked good. The tortoise knew he had to be consistent the whole time, with his small but steady steps.
In investing, people often make a similar mistake when they try to “time the market” or leave retirement planning until too late. They may only invest when the financial markets look strong and the running looks good. Then they tend to sell (or take a nap) when the market looks weak. This is like buying high and selling low, a sure way to lose money and sleep.
So what are the myths, the magic, and the morals here?
Myth: Timing the market, or buying in when an investment looks strong, and selling when it’s weak is the way to profit. (Not!) Another myth is that you can wait until later in life to begin your “race” to financial independence or retirement. (Sorry, that leaves you way behind.)
Magic: Starting saving early gives you the magic of compounding. Double magic—buying a fixed dollar amount on a regular basis is a less expensive, more secure and steady way to build wealth. (True!)
Buying this way is called “dollar-cost averaging.” You end up buying more shares when the price is low and fewer when it’s high. Your overall average buy-in price is lower. You win.
Moral: It’s what you do on a regular basis that determines your long term success. Don’t assume everyone else is always faster/better/smarter with their money. And don’t give up before you’ve even begun!
Steady investing, even of small sums, can lead to long-term rewards. If you can invest twenty-five dollars a week from age twenty-five to age sixty-five, you could have as much as a quarter of a million dollars! If you put that into something like a Roth IRA, it would all be tax-free too.
Reminder—the race can’t be won until you start, and victory doesn’t always go to the fastest. Thanks gentile tortoise, for showing us the way.