In the pursuit of just about any savings and investment goal, time can be a formidable ally.
With enough time on your side, you don't need to be a wizard at picking stocks or other securities to amass a large nest egg.
You don't need any skill in timing the markets. You don't even need a large amount of capital to start out with.
In fact, says the mutual fund firm of Neuberger & Berman Management, an "early bird" investor who has no market savvy at all can beat a much wiser "late bird" on the sheer strength of compounding over time.
To illustrate this point, Neuberger & Berman calculated the results that would have been achieved by two hypothetical investors in the stock market over the past few decades.
"Early Bird" invested $20,000 via 10 annual $2,000 purchases from 1963 to 1972, haplessly buying each time on the very day that the Dow Jones industrial average made its high for the year.
"Late Bird," by contrast, put up $40,000 in 20 annual increments of $2,000 each from 1973 to 1992, adroitly making the investments at the Dow Jones industrials' low for the year on each occasion.
So Late Bird had the dual advantages of twice the investment capital and perfect market timing, while Early Bird had to rely entirely on a time advantage.
Yet, using Standard & Poor's 500-stock composite index as a yardstick, Early Bird came out ahead as of June 30, 1994, with a portfolio value of $264,207 to Late Bird's $256,037.
That result was achieved even though Late Bird was able to rack up an annual rate of return of 14.5%, compared to just 10.1% for Early Bird.
If you rerun this race using a variety of other gauges--the Dow, for instance, or the record of any given mutual fund--the results vary somewhat. In the case of most managed funds, Early Bird wins by a wide margin. In the case of the Dow, Late Bird comes out with a slight edge.
But all the outcomes support a basic conclusion. In the words of Neuberger & Berman: "Although future results may vary, having sufficient time to compound returns appears to be more important than accurately timing the market."
Paul Merriman, an investment adviser in Seattle, has just devised a strategy aimed at carrying this same principle to a dramatic extreme.
After the birth of his grandson Aaron early this year, Merriman hatched a plan to make a one-time investment of $10,000 in a variable annuity held in trust until the year 2059, when the grandson will be 65.
If the investment can earn a compound rate of return of 11.2% between now and then, Merriman figures it will grow to $10 million--enough to finance a secure retirement for Aaron and leave a big bequest to charity afterward.
Friends and colleagues with whom Merriman has discussed this plan have been quick to point out many potential problems and pitfalls with it.
How much will $10 million actually be worth in 65 years? Does he really want to tie up the money irrevocably, considering how many unexpected things can happen in the interim?
Who knows what rates of return will actually be possible in future years, or what types of investments will work out best? What if the tax laws change?
"The future is always uncertain," Merriman responds. "If you can't act until you know every fact, including those that can't be known, you will always be on the sidelines, never in the game.
"Now, in Aaron's first year, is the time to make this investment."