The Dumbest Thing I Never Did
Sometimes your worst mistakes are not sins of commission, but sins of omission. You can be a great stock picker, but if you neglect to sell when you should you can watch all your gains evaporate again. Or even more fundamentally, you can neglect to save and invest in the first place. I learned about saving and investing in my teens. Unfortunately, like so many things we learn in our youth, I ignored the lessons learned. The following article is the first I ever wrote for this website back in August 1997, over two years ago. The numbers have been updated. The principles are fundamental and worth repeating.
Dateline: 08/14/97
Minor Revision: 12/23/99
When I was in my late teens slinging hamburgers at the A&W, my boss lent me one of the most profound books on personal finance ever written. I'm speaking , of course, of George Clason's classic The Richest Man in Babylon. If you've never read it, the book tells the story of some poor but ambitious men in ancient Babylon. They want to be rich so they decide to seek the counsel of Arkad, the richest man in Babylon.
Over the course of their discussions, Arkad reveals to them the "seven cures for a lean purse" and the "five laws of gold". The first principle discussed in the book is this: "A part of all you earn is yours to keep". Simple, yet profound.
Specifically, Arkad recommended saving no less than 10% of all you earn. This formula is repeated in David Chilton's more recent book, The Wealthy Barber as the "Ten-Percent Solution". Chilton's book, is, in many respects, a modern retelling of Clason's story, with some modern particulars such as RRSP's and taxes thrown in.
So what's the dumbest thing I never did? Much as I enjoyed the book, I never followed through on Clason's advice. In my teens I invested about $1100 earned from my newspaper route in mutual funds and stocks. When I got to university I sold them.
For the next ten years or so I lived the single life. I didn't save a dime. Not one sou. Nada! Nothing! Rien! The big goose egg! Hey, I was single. I had no responsibilities, no wife or family to support, retirement years away. Why save?
I didn't really start saving in earnest until I got married at age 32. My wife and I bought a house (one of Arkad's recommendations, by the way). But all my money was being poured into paying down the mortgage. Little if anything else was saved. I did start on the ten per cent solution a few times, but dipped into the funds whenever we needed money for something else.
Then I read Charles Givens's book Wealth Without Risk. I also signed up for his pricey home study course. It led me to completely re-assess our family's situation and do a number of things that had been sadly neglected. We had a will drawn up. I made sure we had adequate life insurance on both my wife and myself. I took out another mortgage on the house and threw the money into RRSP's.
But the best thing that came from Givens course was that it re-introduced me to the ten percent solution and made me take it seriously. Givens workbook has a pledge form to cut out, sign, frame and hang on the wall pledging you to save ten percent of all you earn. I signed, and somehow, putting it on paper and displaying it, made me determined to carry through on that pledge come hell nor high water.
Now I'm not sure which was dumber, selling the stocks and mutual funds I had in my teens or neglecting to save for so many years. Both were pretty bad moves. But let's take a closer look at my decision to sell the investments.
Amazingly, I still remember what they were. I lived in Montreal at the time and I bought 100 shares of Canadian Marconi Company at $6 a share - a $600 investment. I bought Marconi because they owned CFCF TV, Montreal's major English language TV station and I thought it would be cool to own part of a TV station. And the other $500 was divided between United Accumulative Fund and United Venture Fund. Those funds eventually became, I believe, Spectrum United Canadian Equity and Spectrum United Canadian Growth.
I don't know what those shares would be worth today, but let's say they had a modest growth of ten percent a year. That $1100 I had invested in 1968 would today be worth $21,113. If I had been a particularly savvy investor in my teens and put that $1100 in Templeton Growth Fund (16.3% annual compounded return for the last thirty years), that $1100 would be worth $118,676.
That $1100 of my youth would buy me at least a Dodge Caravan today and maybe even matching Beamers for my wife and I! With fifteen years left to my retirement, that $1100 could have provided me with an additional $88,197 in my old age and if it had performed at Templeton's returns, an additional $1,143,035. Incredible but true! $1100 invested one time in my teens and left in Templeton Growth Fund (if it continues to perform as it has) would fund a million dollar retirement!
That massive increase in value is the power of compounding. But what of the principle of putting aside 10% of your earnings every paycheque? I can't really remember how much I earned thirty-one years ago, but I daresay I would have been able to put aside $10 a week or $500 a year. That amount contributed for the last thirty years and compounded at 10% would be worth $100,568 today. Compounded at Templeton's average rate of 16.3% it would be worth $381,819. If carried on to my retirement, the values would be $435,987 at 10% and a whopping $3,703,987 at Templeton rates. Yikes!
If a young person of 18 were to start today and religiously invest only $1000 a year until retirement, he or she would have over $5 million dollars at retirement at an annual compounded rate of 10%. Even at a meager 6% return, that young person would have over $750,000 and well over a million dollars at 7%.
My point is this - if you haven't started saving regularly yet, do so now! Start today. The earlier you start the better. You're never too young.
If you delay, like I did, until I was in my forties, you find yourself having to contribute a lot more to savings than $1000 a year.
I can't emphasize Arkad's advice strongly enough. So let me shout it out!
Note: The books in the article are linked to their pages at Borders.com so you can buy them online. Links are to American editions. If you want Canadian editions, check your bookstore or Chapters Online.
Copyright Notice: The animated Christmas Lights graphic is from About.com's Guide to Horse Racing Cindy Pierson.