"There is an immeasurable distance between late and too late."
Below is the essence of a conversation I had with a friend who was one of these questioners. This is the conversation I had with him. But it's the same conversation I've innumerable times with other folks.
=============Fred: So I’ve read the literature about saving for retirement. What I want to know is when do I REALLY have to start saving? And don’t give me the same old crap every other person in the financial services industry spouts… that it’s an emergency and I have to start yesterday.
Trader: I’m not in the financial services industry.
Fred: So you’re not gonna give me that it’s an emergency nonsense then?
Fred: Good. So when do I really have to start?
Trader: Before now.
Fred: What does that mean?
Trader: It means before now.
Fred: Explain please.
Trader: It means you should have started saving and, more important, trading long before now.
Fred: How long before now?
Trader: From the womb.
Fred: Very funny… How could I have traded from the womb?
Trader: Someone should have been doing it for you before you were born and handed it off to you as a coming of age gift.
Fred: Why is that so important?
Fred: Are you being an ass again?
Trader: Perpetually. But it really is magic…
Fred: Explain please.
Trader: It’s the magic of compounding.
Fred: Which means?
Trader: Let’s say someone silly enough to love you deposited $1,000 in an IRA on your behalf at birth and managed to add an additional $100 each month until handing it off to you in 20 years at which time you continued adding $100 monthly until retiring at 65. Assuming the account earned 1% interest annually for the life of the account what do you think the balance would be worth when you turned 65?
Fred: I can’t do that math in my head… I don’t know, 100 grand?
Trader: $81,000 give or take. Now assume no additional monthly contributions, but an 8% annual return on average over the same 65 years. What do you think that would amount to?
Fred: Can you just tell me please?
Trader: I could.
Fred: But of course you won’t. Okay… so 8% per month, no additional contributions huh? It’s gotta be less right?
Trader: Wrong. $1,000 compounded 8% annually for 65 years is about $148,000.
Fred: It’s MORE?
Trader: Yup… that’s the power of compounding.
Fred: Wow… so what about if we put them both together? Additional $100 and 8% compounded annually.
Trader: No need really... Here…
(Hands Fred a sheet with the table below).
Fred: What is this? Some of your trader tricks?
Trader: Nope… its basic math… and a helluva lot more than you even need to do what I do.
Fred: (after studying sheet) So is that 1.5 million just for having a decent return each month... without adding $100 monthly?
Fred: You’re not a Spanish speaker.
Trader: But I play one on tv.
Fred: What about taxes?
Trader: What about them?
Fred: Don’t all the experts say that tax impact will destroy your returns? Isn’t that reason enough to avoid churning your account? Certainly that and commissions?
Fred: Depends on what?
Trader: Depends on whether you would turn down a promotion at your job because it will increase your pay and thus potentially increase your tax burden. Besides, depending on how you do it, taxes are, at a minimum, deferred.
Fred: What’s that?
Trader: Means the you wouldn’t have to worry about them for a long time.
Fred: Ok.. Well all the professionals say anything north of 7% consistently is a pipe dream.
Trader: I smoke a different pipe. Actually, I smoke cigars.
Fred: So you’re saying I can make 18% per year?
Fred: Ah ha…
Trader: I’m saying you should make more than that.
Trader: What what?
Fred: And how exactly would you propose I do that? 12% per year is 1% per month.
Trader: That’s only about 5 basis points per day in an average month of 20 trading days. On a $1,000 account that equates to about $0.50 per day… $2.50 per week.
Fred: WHAT? Are those more of your trader tricks?
Trader: Nope… What’s 12% of $1,000?
Trader: Correct. Now what is 120 divided by 12?
Trader: Who says you’re an idiot? Now what is $10 divided by 4?
Fred: [Silence]… Then… “It can’t be.”
Trader: Sure it can. It’s ok… you can say it… I already know the answer.
Fred: That seems so simple.
Trader: That’s because it is.
Fred: [Silence]… Then… “Okay… but there are 2 problems with that.”
Fred: I don’t have 65 years.
Trader: You don’t need them.
Fred: The chart says 65 years…
Trader: Assuming no additional $ and only 12%/year. You can do better than 12%. And that changes everything. What’s the 2nd problem?
Fred: I assume those returns are from day trading… I don’t have the time to do that.
Trader: Those returns are timeframe agnostic…
Fred: What the hell is agnostic?
Trader: Careful with such language… My ears are delicate. Agnostic just means the returns are not specific to 1 way of trading. If you have a profitable process and minimize your risk at every turn, you should be able to double your account annually without too much difficulty…
Fred: WHAT? How would I do that?
Trader: So sorry… Gotta run...