Behold the Weakness of Late

Claudette and Claude each start an IRA.

Claudette put $2,000 in a year starting on January 1, 2001 and put $2,000 in every year (on January 1^st) through 2008.

Claude started his IRA on January 1, 2009. He put $2,000 a year in every year (on January 1^st) for 32 years through 2040.

Each person averages the same rate of return of 10% per year.

This illustrates, once again, the impact that time has on investment results and the importance of starting as early as possible.

Claudette Starts Contributing in 2001

2001 Claudette’s Contribution: 2,000 Claudette’s Yr End Value: 2,200

2002 Claudette’s Contribution: 2,000 Claudette’s Yr End Value: 4,620

2003 Claudette’s Contribution: 2,000 Claudette’s Yr End Value: 7,282

2004 Claudette’s Contribution: 2,000 Claudette’s Yr End Value: 10,210

2005 Claudette’s Contribution: 2,000 Claudette’s Yr End Value: 13,431

2006 Claudette’s Contribution: 2,000 Claudette’s Yr End Value: 16,974

2007 Claudette’s Contribution: 2,000 Claudette’s Yr End Value: 20,872

2008 Claudette’s Contribution: 2,000 Claudette’s Yr End Value: 25,159

Claudette Stops Contributing and Claude Starts Contributing in 2009

2009 Claudette’s Contribution: 0 Claudette’s Yr End Value: 27,675

2009 Claude’s Contribution: 2,000 Claude’s Yr End Value: 2,200

2010 Claudette’s Contribution: 0 Claudette’s Yr End: 30,442

2010 Claude’s Contribution: 2,000 Claude’s Yr End Value: 4,620

2011 Claudette’s Contribution: 0 Claudette’s Yr End: 33,487

2011 Claude’s Contribution: 2,000 Claude’s Yr End Value: 7,282

2012 Claudette’s Contribution: 0 Claudette’s Yr End: 36,835

2012 Claude’s Contribution: 2,000 Claude’s Yr End Value: 10,210

2013 Claudette’s Contribution: 0 Claudette’s Yr End: 40,519

2013 Claude’s Contribution: 2,000 Claude’s Yr End Value: 13,431

2014 Claudette’s Contribution: 0 Claudette’s Yr End: 44,571

2014 Claude’s Contribution: 2,000 Claude’s Yr End Value: 16,974

2015 Claudette’s Contribution: 0 Claudette’s Yr End: 49,028

2015 Claude’s Contribution: 2,000 Claude’s Yr End Value: 20,872

2030 Claudette’s Contribution: 0 Claudette’s Yr End: 204,801

2030 Claude’s Contribution: 2,000 Claude’s Yr End Value: 157,086

2035 Claudette’s Contribution: 0 Claudette’s Yr End: 329,834

2035 Claude’s Contribution: 2,000 Claude’s Yr End Value: 266,420

2040 Claudette’s Contribution: 0 Claudette’s Yr End: 531,201

2040 Claude’s Contribution: 2,000 Claude’s Yr End Value: 442,503

Claudette’s Total Contribution ( 2001 – 2008 ) is $16,000

Claude’s Total Contribution ( 2009 – 2040 ) is $64,000

Claude put in 4 times the money that Claudette put in, yet Claude has $88,698 less.

Claudette put in a lot less money than Claude, but started 8 years earlier.

Behold the Weakness of Late!

Danger of Presuming the Future – “Look! In the Sky! It’s a Bird! It’s a Plane! It’s …”

Finally, I have one last word related to the matter of age and Social Security. Social Security was never intended to provide for retirement. It was intended to supplement your other preparation for retirement or to provide a bare bones subsistence to those who were unable to prepare. When it first started, the average recipient lived 6 months after starting to receive benefits. Now recipients live a lot longer. The money was never invested in an aggressive way, which would be appropriate for a long term investment. It was never really even invested in a conservative way.

We borrowed money from the social security trust fund for general operating expenses. If the social security trust fund were in a large chest and you opened it, you would find “IOU’s” signed by successive Congresses down through the years. These “IOU’s” are supposed to be legal instruments. On paper, there is a lot of money in these instruments. In reality, there is nothing backing these up. In effect, the surplus that existed was used for general operating revenue and the current workers directly supported the current retirees. If the money had been invested, there would be a large surplus stacked up by now.

With the demographics at work, the aging population being a much larger percentage of the population than ever before, the social security system will be stressed in the future as never before. One projection I heard, for example, is that a point will be reached in this century when one half of the population will be over 60 and one person in ten will be at least one hundred! Whether or not that is accurate, I do not know, but just think of the “Hell No! We Won’t Go!” folks from among us Baby Boomers getting old and not intending in the least to do it gracefully.

Imagine these folks, with real political clout, saying, “You ain’t gonna warehouse me in an old folks home and expect me to just lie there waiting for death! Hell No! We won’t go! If anybody is gonna be warehoused, it ain’t gonna be me!” Think of the stresses at work in our society as the resources are juggled to find a way to placate a politically powerful majority who may not be amenable to compromise.

Will social security collapse? Any political party that advocated the death of social security would be committing political suicide, especially since elderly folks will have greater political clout than ever before. Human nature being what it is, there will still be large numbers of people who have never prepared for retirement at all. Social Security will probably be changed repeatedly: later ages to qualify for benefits, smaller benefits, and much higher social security taxes. There will be enormous pageants of demagoguery over this issue, but it will probably continue to exist. The wise course of action would be to prepare as if social security will not be there waiting for you. Then if it is, it will be a tiny augmentation to what you have prepared for yourself with all of the other ways you invested. Social security would be a little extra surprise.

I do not believe it will be terminated, but to be safe, do not count on it. If it does collapse, it will not fall on us Baby Boomers. It will tumble down on the schmucks that come behind us, the Generation X-ers, Y-ers, and Whatever-ers, that we are saddling with our debt. We are hacking away at each other, the left and the right, demagogueing, while our children and grandchildren are probably losing their chance for a prosperous future. Well, who cares, as long as we, the wonderful BB’s, are taken care of. Pardon me as I wipe the dripping sarcasm off my chin before I continue.

One argument that I hear is that technology will save us. Productivity will explode so massively, as it has in the past, that everyone will have everything they need, so much so that the failure of the BB’s to live within our means will not have the consequences for those that follow that it would have otherwise. Maybe so, but is it fair to those who come after us to gamble on that possibility? Let me illustrate the problem I see with the following observation. I was watching a town hall-type meeting on TV several years ago, perhaps 15 years ago. On the platform, there were 4 liberal folks: 2 pundits, an academic, and a bureaucrat. There was also one conservative academic. (They located him for the show by referencing the endangered species list.)

The audience of “everyday Americans” began to suggest programs that they felt should be implemented to facilitate all of our lives. It was a shopping list of Nanny State programs that would pile massive debt on the backs of future generations, though no one in the audience seemed to understand that. Even the liberals, all 4 of them, commented on this. “These are all wonderful things, I’m sure, but no one here is asking the question, ‘How will we pay for all of this?” “If we do these things on credit, which is what we usually do, who pays for it, your children, your grandchildren?”

Even after the liberals and the lone conservative raised this issue, this group of about 300 people just kept right on getting on Santa’s lap and telling him what they wanted. It is as if most folks believe there is this inexhaustible, massive pile of cash somewhere, one the “money-grubbing rich folks” just don’t tell us about, that we can tap into forever. When he visited the young United States, Alexis de Tocqueville predicted that the American experiment in democracy would work well until the electorate realized they could put themselves on the dole. Give the guy some kind of award for prescience. No, Virginia, there is no Santa Claus. There is you and me and all of us and we have to pay for our own here and now and let the people of tomorrow have all of their money available to them to pay for their tomorrow, not our today.

We need leadership in this area, a strong communicator who can somehow break through our thick skulls without being shot down with the outrageous slings and arrows of flaming class warfare rhetoric. By the way, it “ain’t” me. I do not have the necessary skills. If it is you, stand up and take on the job. I will supply the tights and the hero suit. Imagine a bullet proof guy, no, a demagogue proof guy, flying around in a costume with “PAYGG” emblazoned on his chest. “Look, in the sky, faster than a speeding spending bill racing through Congress, more powerful than an entitlement mentality, able to leap over tall taxes in a single bound. It’s a bird! It’s a plane! It’s ‘Pay As You Go Guy’ and he is saving our children and our grandchildren!”

Imagine these poor young working slobs paying most of their income (in total taxes: income and social security taxes) just so old retired hippies (we Baby Boomers) can eke out a meager existence. Are we going to have soldiers with M-16’s go into their government owned shacks and roll them out of bed and make them go to work at jobs that will pay them nothing because all of their income will go to taking care of us old goats? We old people will rule the country for the first time in our history because we will be the majority and our generation is not exactly renowned for our selflessness. Is there a possibility of a Civil War, one based on age, like none ever witnessed before, the young folks rising up in rebellion against the oppression of the old?

I’m kind of joking here, but I’m also kind of not joking. Do whatever you can to prepare for retirement. There is more at stake than just you. You need to do this also for the benefit of future generations. The welfare of your children and your grandchildren could be at stake.

I WILL EMPHASIZE HERE AGAIN THAT, if you are new to this, You SHould read “24 Essential Lessons for Investment Success” by William J. O’Neil in order to BEGIN TO understand how to make your investment decisions and to try to get the higher returns.

http://www.HushDoNotTell.com

Danger of Presuming the Future – Do the Sly Guys Diversify?

It is also important, being that we cannot presume the future, to practice diversification and dynamic asset allocation. Solomon said about diversification in investing, “Give a portion to seven, and also to eight.” Being that he was a multi-billionaire, far wealthier, within the context of his time, than Gates or anyone in our time; he might have known something about wealth building. In other words, “Set up seven tracks of wealth building and eight tracks would be even better.” You might take one track based on the best possible information and it just flat will not work despite your best research.

I use stories of cockatiel and orangutan ranches to illustrate the power of compounding in previous posts in this blog. What I do not show you is that you could start with 12 animals and grow to vast numbers, but the result could gyrate wildly up and down in particular years. There might be years of unbelievable growth and years of devastating decline. What if a “year of devastating decline” happens just as you are preparing to retire? You could even start with 12 units and end with 10 units or none at the end of the 70 years. The whole thing can go wrong no matter how thoroughly you investigate before you invest or how careful you are in monitoring the investment. This is why the sly guys diversify.

If you start with an IRA when you are young, you might decide to put $1000, at perhaps $20 a week, in a mutual fund and another $1000, at $20 a week, in another mutual fund. You might do this for several years or all the way through, depending on what you decide. However you do it, this represents two investment tracks. Then later you set up another track, perhaps even in something other than a mutual fund, and then another and another and so on. You protect yourself by breaking your investing up into parts.

Consider the following example, which illustrates the wisdom and power of diversification. There are two investors that we will give the very imaginative designations of “A” and “B.” A and B each has $100,000 to invest.

A is archly conservative and finds an investment that is 100% guaranteed safe which will pay a 6% return each year.

A puts the entire $100,000 in this one investment and lets it compound annually for 30 years at a safe 6% per year.

B breaks her $100,000 into 5 parts of $20,000 each. B is more adventurous and puts each $20,000 in a higher risk investment that also has a higher chance of a larger return.

(I wonder if this lady is the Aunt B on the Andy Griffith Show. Oh, that’s right; she is probably Aunt Bee, not B. Sorry, my bad.)

The first $20,000 in B’s first investment is completely lost. She not only does not make any return, but also loses the original $20,000.

The second $20,000 in B’s second investment has a return of 0%. She makes nothing, but at least still has the original $20,000 at the end of the 30 years.

B’s third $20,000 investment has a return of just 5% that compounds annually for 30 years.

B’s fourth $20,000 investment has a return of 10% that compounds annually for 30 years.

B’s fifth $20,000 investment has a return of 12% that compounds annually for 30 years.

At the end of the 30 years, A has $574,000 and B has $1,054,000.

Notice that ³/₅ of B’s investments did more poorly than A’s one investment did, yet B has more money. Behold what diversification can do for you!

Asset allocation has to do with the formula you use to break your investing up into parts. You have a risk tolerance that fits your outlook and personality. The way this is normally laid out would go something like this.

If you are an aggressive risk-taker, you might go maybe 70% in growth oriented stock mutual funds, 20% in bond mutual funds, and perhaps 10% in money market.

If you are more conservative, you might put 50% in stock mutual funds, 30% in bond mutual funds, and 20% in money market funds.

If you are archly conservative, you might put 30% in stock mutual funds, 40% in bond mutual funds, and 30% in money market funds. It is perfectly alright to be careful, but you have to realize that “careful” generally requires a commitment to larger contributions over time because “careful” tends to get the lower rates of return in the long run.

There are also, of course, many other investment options beyond mutual funds. There are folks in the financial advising community who are increasingly touting the importance of thinking outside the box, of getting outside that poor maligned box, to invest in alternatives such as precious metals, life settlement pools, real estate, and other things. There are even those who argue that the old “build it with a 401(k) and an IRA” days are over and we just don’t get it yet.

(I actually found the literal box that everyone is trying to think out of and I made an authentic, 100% genuine replica of it that I sell for 25.95 plus 5.95 shipping and handling. Order by sending a check or money order in the amount of $31.90 to: Out-Of-The-Box Box, 13236 Lexington Lane, Balch Springs, Texas 75180. Please allow 8 weeks for delivery. So if you want to think outside the box and invest in the out-of-the-box box, let me know and I will cut you in on this exciting new “out-of-the-box” investment opportunity.)

Dynamic asset allocation means that the percentages assigned change with changing trends, the economic climate, the recent history of the Prime Rate, and other factors. A financial planner would help you understand the factors and trends at work and, in consideration of your basic risk tolerance, help you decide what percentages to assign to each area. With dynamic asset allocation, these percentages change over time as factors and trends change. If a financial planner does not practice dynamic asset allocation, then they are probably really just practicing “buy and hold”, even if they call it something else. “Buy and hold” refers to investing in something and just riding it throughout the decades no matter what happens. The decision is yours. If you wanted to have one investment track (or more than one) of “buy and hold”, that would be your choice.

One other factor in this is your age. When you are young, you can afford to be aggressive. Generally speaking, the more aggressive you are in your investment selection, the more money it will make over the long run. The tradeoff is volatility (the drastic short term up and down-ness of it). In the short term, there will be periods when the aggressive-oriented investment will go down, but it will tend to increase over the long run. These are the funds and stocks that have the giant gains over the decades, but also have scary plunges in particular years.

When you are young, you can take these hits because you have plenty of time to recover. When you get near retirement age, you cannot afford to drop one third or one half of your portfolio value overnight, because your portfolio (all the things you invest in) might not recover in time for you to retire. So, when you are older, you tend to have a more conservative asset allocation. A good financial planner or investment advisor can help you understand this and help you decide on an appropriate investment mix.

http://www.ehow.com/members/littlecashgiant.html A how-to blog on debt destruction and wealth building.

Danger of Presuming the Future – “If a Tree Falls in the Woods”

A philosophical question: If I am in the woods, and my wife is in town and cannot hear me when I speak, and I say something, am I still wrong? Can I ever presume that I am right? Of course not! I cannot presume to be right any more than I can presume to know the future. “Boast not thyself of tomorrow. For thou knowest not what a day may bring forth!” The Dogs of the Dow Strategy has worked for the last 45 years multiplying a beginning amount by 50 every 20 years. Therefore, we know for a certainty that it will continue to work this way in the future.

“Not!!!!!!!!!!!!!!!!!!!!!!!!” No, we do not know this. The stock market has been the main driver of wealth accumulation for over a century and will continue to be so long into the future. Really? Are you sure of that? We live in exciting times and dangerous times. There are major demographic forces at work and technological breakthroughs just over the horizon that will bring the possibility of amazing opportunity and, at the same time, unprecedented peril.

At some point in this century, the tidal wave of “it’s all about me” consumerism and investment activity generated by the Baby Boomers will fizzle off into retirement placidity. There will, one day soon, be a situation where one retiree will be supported by two workers. And imagine what happens if life expectancy is increased dramatically by medical advances and you young devils find yourselves stuck with us old geezers for a lifespan of 40 years longer than expected. Shazam! Will Social Security collapse? Will the stock market’s up and down cycle that is more up than down in the long run be changed by the sudden absence of large numbers of Baby Boom investors? And consider the effect of other technologies. Heard anything lately about material science and bioscience?

There are major multi-billion dollar projects underway now in these areas. The nation that figures out the material science puzzle first is supposed to be the new economic superpower. When you can restructure matter at the sub-molecular level, you can create anything you desire: products that can be constructed in a microwave-appearing device in the home by reconstituting molecules of air, heavy durable goods assembled by an automated process from the basic building blocks of matter found in anything whatsoever, or a navy of one thousand vessels that appears overnight manned by robotic beings armed with weapons of mass destruction. (Upon seeing the Tower of Babel, God said, “And nothing shall be impossible to them that they desire to do.”)

Bioscience has the potential for creating an amazing bounty of food and wealth and also for environmental disaster. There was a documentary on PBS (I was one of the six people who watched it) about bioengineering. A species of salmon was altered so that it grew much larger than normal and much more quickly than normal. The females of this species have always mated with the largest males because they are the ones, it is theorized, who have always possessed the greatest skill at surviving. (It is “theorized” because no one has actually talked to a female salmon except for a male salmon. However, “Hey, chicky baby, you lookin’ fine!” would not contribute anything to our understanding.) These genetically altered fish were so young and inexperienced that they were poor at surviving, yet the females mated with them because of their size. These bio-engineered fish are kept in pens surrounded by wire mesh in the ocean. They grow very large and are a potential source for a harvest that could help eliminate hunger in the world.

There have been computer projections that have been done on what would happen if they escaped the pens and bred with the salmon in the open ocean. These studies suggest that the entire species could cease to exist in a few months. The young inexperienced fish can survive in the pens. But after their genetic structure became dominant in the species because of the female’s preference for them, the species at large would be incapable of surviving. Some scientists claim that this could happen, though it’s not likely, if even just one fish escaped. Many of the bioscience developments have this two-edged sword kind of potential for blessing and disaster. Bioscience can help bring a Great Dawning or a Great Doom. There is a feeling is some quarters that we are playing God and we are not really qualified for the role. One tiny miscalculation, one microscopic error, could hurl a species into oblivion or create an environmental catastrophe of Biblical proportions.

So let’s all just curl up in a fetal position and cry for the fear that is come upon us. “Woe! Woe! Woe!” No, more like whoa! Hold on there! Let’s remember our Lamaze training and breathe: “Hee, hee, hoo, hoo, hee, hee, hoo, hoo.” Feel better now? Ok, let’s find some hope in all this.

First, let’s state the Reward Principle: The reward we receive is proportionate to the size of the problem we solve. Maybe the business world does not always work this way, moment by moment, but it should. Ultimately, in the long run, I believe it does. A problem, then, is an opportunity for wealth building. You figure out how to solve a problem and then get someone to pay you to solve the problem. An abundance of problems equates to an abundance of opportunity.

Second, there have been forecasts (negative and positive) in the past that were wrong. “Social Security is going to collapse.” A lady I work with who is in her sixties said that she has heard that all of her life. “Everything that can be invented has already been invented.” This observation was made at the dawn of the twentieth century. “There will be air conditioned domes covering cities in the future.” Can you imagine the fuel cost on that one? This idea, portrayed in futuristic magazine articles in the fifties, betrayed the notion that cheap fossil fuel was supposed to be virtually unlimited and would always be available in abundance. We were also waiting for the “problem” of radioactivity to be solved so that atomic energy would usher in the New Age. Post war optimism was so great that we were sure it would just be a matter of time before this “problem” was solved. There was an old Bugs Bunny and Elmer Fudd cartoon that showed Elmer shooting at Bugs through the decades. When he got to the sixties, he was using a ray gun. There were folks predicting flying cars by the nineties.

We always expect a lot out of our future. In the past, they thought we would be doing exotic, spacey things in our time that never came to pass. Yet there were many other things that came into existence that were far beyond what anyone imagined: the personal computer, the Internet, VCR’s, DVD’s, the gigantic share of our economy dominated by entertainment, World War II, the Holocaust, the slaughter of 100 million people in a vain attempt to impose Marxism on the people of this planet. Most of what we fear never happens. Most of what we hope for never happens. Then other more terrible and more wonderful things that we cannot imagine do happen. We adjust, we study trends and try to stay ahead of these as they change, and we position ourselves to serve by solving new problems.

Third, rapidly developing change is the order of the day, the norm. This is both a problem and an opportunity. In April of 1995, I was sitting in an introductory Systems Management class at the University of Texas at Dallas and the professor said that the head of his department believed that there had to be a way to use the internet for commerce of some kind. That was just 160 months ago, as of this writing. Just 160 months ago, the internet was not commonly used as a marketplace. Now, every product, every new movie, every TV show has its own website. If you miss one investment “train”, worry not, another one will be along shortly. A tsunami of change and problems presents a plethora (I just had to find an excuse to use that word) of opportunities to respond and solve the problems and collect the financial rewards for doing so.

In light of all of this, the problem, then, in the investing arena, is knowing what the trends are and how to use them to make money over the long run. My answer to this problem is that I have no answer. I study all the time and recommend that you make reading, studying, and research a way of life. But, even at that, I am not smart enough and not knowledgeable enough to stay ahead of this game. So I try to identify certain people who are consistently ahead of the curve. Two such people at the present time are, in my opinion, William J. O’Neil (editor of “The Investor’s Business Daily” and author of “24 Essential Lessons for Investment Success”) and Martin Weiss (www.moneyandmarkets.com).

There are several other “ahead of the curve” guys and gals, but I want to keep the list short to simplify things for the one who is just now beginning to try to understand the process of making investment decisions. If this is new to you, just try to get your mind around a few concepts at first to keep from being overwhelmed. Remember, you can go to the nearest IBD Meetup Group to surround yourself with mentors who will help you through the investment decision process. Look on the internet to find the location of the nearest Investor’s Business Daily Meetup Group.

You will identify several others, as you go along, that have a handle on what is going on, a perspective that is overarching, and who are perceptive of the shape of things to come. You can tag along with people like this, not that you just blindly accept whatever they recommend. Check out the trends they see and investigate the information they provide, and if you agree, act on it.

http://www.DebtDestructionEngineer.blogspot.com Your wealth is hidden in the fragments of your life.

Behold the Power of Matching

With Group 4, Wilma does everything she did with Groups 1, 2, and 3. One day, when she is trying to decide what new changes to try on Group 4, Burly Buford comes by to look at the orangutan ranch that Wilma and Willy are starting. He says that he is so impressed with the wonderful job that Wilma and Willy do at “Burly Buford’s Car Wash” that he wants to help them grow their orangutan ranch.

“I will match at 50 % whatever money you spend to buy new orangutans. For every dollar you kids put up to add an animal, I’ll add 50 cents so you can add animals even faster. This will be a benefit that I give to the two of you just for working for me and for doing such a wonderful job.” Wilma and Willy cannot believe the graciousness of the offer.

Group 4 grows at the same rate as Group 3, at 11 ¹/₃ % per year, but with the extra help of Burly Buford’s 50 % matching.

Wilma and Willy’s Orangutan Group 4 Starting with 12 Animals when Wilma is 20

(Growth of 11 ¹/₃ % with 1 Orangutan Added a Year with Burly Buford 50 % Match)

Wilma’s Age: 20 Number of Orangutans: 12

Wilma’s Age: 21 Number of Orangutans: 15

Wilma’s Age: 22 Number of Orangutans: 18

Wilma’s Age: 23 Number of Orangutans: 22

Wilma’s Age: 24 Number of Orangutans: 26

Wilma’s Age: 25 Number of Orangutans: 31

Wilma’s Age: 26 Number of Orangutans: 36

Wilma’s Age: 27 Number of Orangutans: 42

Wilma’s Age: 28 Number of Orangutans: 48

Wilma’s Age: 29 Number of Orangutans: 55

Wilma’s Age: 30 Number of Orangutans: 63

Wilma’s Age: 31 Number of Orangutans: 72

Wilma’s Age: 32 Number of Orangutans: 82

Wilma’s Age: 33 Number of Orangutans: 93

Wilma’s Age: 34 Number of Orangutans: 105

Wilma’s Age: 35 Number of Orangutans: 119

Wilma’s Age: 36 Number of Orangutans: 134

Wilma’s Age: 37 Number of Orangutans: 151

Wilma’s Age: 38 Number of Orangutans: 170

Wilma’s Age: 39 Number of Orangutans: 199

Wilma’s Age: 40 Number of Orangutans: 214

Wilma’s Age: 41 Number of Orangutans: 240

Wilma’s Age: 43 Number of Orangutans: 300

Wilma’s Age: 45 Number of Orangutans: 376

Wilma’s Age: 50 Number of Orangutans: 653

Wilma’s Age: 55 Number of Orangutans: 1128

Wilma’s Age: 56 Number of Orangutans: 1257

Wilma’s Age: 57 Number of Orangutans: 1402

Wilma’s Age: 58 Number of Orangutans: 1562

Wilma’s Age: 59 Number of Orangutans: 1741

Wilma’s Age: 60 Number of Orangutans: 1940

Wilma’s Age: 61 Number of Orangutans: 2161

Wilma’s Age: 62 Number of Orangutans: 2408

Wilma’s Age: 63 Number of Orangutans: 2682

Wilma’s Age: 64 Number of Orangutans: 2988

Wilma’s Age: 65 Number of Orangutans: 3328

Wilma’s Age: 66 Number of Orangutans: 3707

Wilma’s Age: 67 Number of Orangutans: 4129

Wilma’s Age: 68 Number of Orangutans: 4598

Wilma’s Age: 69 Number of Orangutans: 5121

Wilma’s Age: 70 Number of Orangutans: 5703

For Wilma and Willy with a growth rate of 11 ¹/₃ % and with adding 1 orangutan each year without the match, the total number of orangutans is 4668.

With a growth rate of 11 ¹/₃ % and with adding 1 orangutan each year with a 50 % match from Burly Buford, the total number of orangutans is 5703.

The match by itself has caused an increase of 1035 orangutans, which is an increase of 22 % in the number of orangutans at the end.

For Wilma’s parents, the total for a growth rate of 8 ¹/₃ % with the addition of 1 orangutan each year was 1353 at age 70.

For Wilma and Willy with the 11 ¹/₃ % growth and with adding 1 orangutan each year with the 50 % match, the number of orangutans is 5703.

There are 3315 more orangutans at the end at 11 ¹/₃ % growth with the addition of 1 orangutan each year and with the 50% match than there was at 8 ¹/₃ % growth.

An increase of 3 % in the rate of return and 50 % matching have caused an increase of 321 % in the number of orangutans at the end.

This great difference that matching makes on your ability to grow wealth is what we in the fancy smancy, high falutin’, sophisticated world of financial planning call the “Burly Buford Effect”.

Behold the Power of Matching

In real life, of course, it would not work exactly like this. Even if you average a certain percentage of growth over the long run, there will be individual years that do a lot better and a lot worse. The growth would not be uniform as in the charts. Some years, growth would be a lot higher than the average and some years it would be a lot less than the average. There would be years when the loop you were trying to grow would actually get smaller than it was the year before. There will probably almost never be an individual year that would have exactly the return that was averaged over the decades.

This non-Orwellian “animal farm” story demonstrates that a 401(k) program where you work that has company matching like the matching done by Burly Buford is an amazing wealth building opportunity. You can experience the ominous power of the “Burly Buford Effect” by contributing to a 401(k) with matching. Its growth is protected from taxation, which allows it to grow much faster than anything you would try to build that was constantly diminished by taxes. When you are not protected from taxes, it is like you are starting 100 yards behind the other racers. You have to run 100 yards before you ever get to the starting line.

Most of us simply do not grasp the fact that a 401(k) with matching can be a phenomenal vehicle for amassing wealth. Look at the numbers of orangutans and put 2 zeroes behind the numbers if you want to imagine that each animal represents $100 or put 3 zeroes behind it if you want to let each orangutan represent $1000. In other words, if a unit is $100, then you start with $1200 and add $100 a year. Whatever the final number is at the end would be that many $100 bills. If a unit is $1000, you start with $12000 and add $1000 a year. Whatever the final number is at the end would be that many $1000 bills.

If you think $1000 is a problem, look at it like an eagle who sees events as they flow over time. How much would you have to put aside to invest $1000 a year? It is about $20 a week. If $20 a week can not be done right now, then do $10 a week and you would be putting $500 a year in your 401(k). If you absolutely can only do 1 %, then do that and increase your pre-tax withholding every time you get a raise even if you increase it just 1 % each time. If your company matches up to your 5 % contribution (or whatever the percentage is) do whatever you can to contribute at least that amount so you can reap the benefit of the tax shielded growth and matching.

You should, of course, do several other things to invest and build wealth and the process is not as cut and dried as it is portrayed here. There are all kinds of wrinkles and variations that go into running a successful investment strategy over the years. There is much you can and will learn, but if you can at least get to where you contribute to the percentage that qualifies for the matching (5 % or whatever it is) by age 30 to 35, you will have gone a long way toward preparing for your future.

once again, especially for young investors just starting out, i recommend that You read “24 Essential Lessons for Investment Success” by William J. O’Neil in order to understand how to make your investment decisions and to try to get the higher returns.

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