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You are here: Home / Beginning Investors / Reviewing The Fundamentals of Investing

Reviewing The Fundamentals of Investing

September 20, 2013 By Lowell Herr

Reviewing The Fundamentals of Investing 1

Search this blog site for “The Golden Rule of Investing” and you will pick up the basic ideas of Rule #1 of Investing. The Golden Rule of Investing is – “Save as much as you can as early as you can.”  Burton Malkiel puts it this way. “The amount of capital you start with is not nearly as important as getting started early.  Procrastination is the natural assassin of opportunity.” It is incredibly difficult to convince the young of the importance of saving early. Select something that is totally unnecessary such as TV cable, smoking, drinking bottled water, or owning a pet (I know from first hand experience).  Save the amount normally spent on the frivolous and you will be surprised what you have when you retirement. Recently I ran a Monte Carlo analysis of what one would end up with at retirement if one saved what they spend in bottled water. Would you believe a teenager would accumulate a nest egg well in excess of $200,000.

The number depends on a variety of assumptions. My point is, take something you know you do not need, or can reduce in amount, and save that money in an account set aside for investing. Take the first step and begin to save today. Not tomorrow, but today. The secret to preparing adequately for retirement slowly, but surely, is the miracle of compound interest as it kicks into effect.  Albert Einstein described compound interest as the “greatest mathematical discovery of all time.” Take advantage of it while you are young. When I see a teenager smoking, I think to myself. How foolish, as they are burning up a million dollar portfolio plus harming their health.

Learn the “Rule of 72.” For example, it will take approximately 7.2 years for an investment to double if the interest rate is 10%. (72/10 = 7.2) Moments ago I checked the interest rate on the corporate bond ETF, HYG, and the yield is over 6%. Another ETF, IDV, is throwing off a rate of 5.2% so it will take 72/5.2 or approximately 13.8 years to double.  Keep that up over a lifetime of doubling and doubling again and it begins to become real money if one saves early in life. Search for “Goofus vs. Gallant” on this blog and you will find another example of why it is so important to begin investing while you are young. Think of items you can do without or reduce, and then save the money you do not spend.

I recall talking to a millionaire and he told me he accumulated what he did by always buying used cars. He never owned a new car, but saved the difference between the price of a new car and a used car. The key is to actually save the money and invest it wisely. It is difficult to comprehend how many more millionaires we would have in this country if everyone stopped buying soft drinks, drank tap water, and invested what they spend on sugar water. We would reduce tooth decay, have healthier citizens, and the country would be in better shape financially.  Only the “cola” companies would suffer. There are so many examples where each of us can save money and still not impact our basic living. Take the steps necessary to begin saving and investing today. Even small beginnings will turn into big things if one stays disciplined over a lifetime.

PS When you search for “The Golden Rule of Investing” be aware you will also pick up this entry. Any time I suggest a search for a word, the current entry will show up since that key word is in the current entry.

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