Investing: When Time Really Is Money

You have probably often heard this business dictum: “Time is money!”

It’s meant to light a fire under employees who miss opportunities to sell more or otherwise help a business grow. More than most people, a business owner understands completely how inertia actually costs capital, while energy expended can grow it.

When it comes to retirement investing, we are far removed from the actual making of the money. It can all seem mystical. Put money into an investment. Wait. Take money out.

What happened in between? To put it simply, your money grew because of time.

Businesses issue stock and bonds in order to raise capital. They then use that capital to make more. For them, stock is just another way to borrow.

If the business succeeds, its earnings grow. The number of investors who want that stock rises, and thus the stock price rises as well.

Businesses also generate cash, money which many of then distribute back to shareholders in the form of dividends.

Added together, capital appreciation (a rising stock price) and dividend payments equals total return. The only reason people buy and hold stocks is because, historically, the total return for stock ownership has been higher than straight lending, such as through a bond.

That rate of return varies, of course, but here’s the thing about long-term investing. You’re going to be at it long term. All you really need to do is make sure that your risk levels are appropriate to your goals, and that your return is both reasonably high and reasonably steady.

The steadiness comes from own a mix of stocks, bonds and other asset classes, together in the form of a portfolio. Rebalancing — selling investments that have gained and using the proceeds to buy the ones that are “on sale” in comparison — is a nifty way to pick up extra return you otherwise miss.

Investing, magnified

Now the tricky part: The longer you invest, the more money you have. Why? Because all of your incoming cash, as rebalanced gains, interest payments and dividends — magnifies your portfolio through compounding.

If you double your money from $1 to $2, the next double the total jumps to $4, then $8. Compounding is how retirements happen, and time is the motor that drives the whole thing. Time literally is money.

How can you harness time? First, save enough. Second, invest it prudently. Third, wait. Compounding is a powerful force, and it’s the way you can assured of reaching your retirement with more.