by Archie M. Richards, Jr., CFP^®
April 28, 2003

Get started with your investments as early as you can. Let time and compounding do the work. Here's an illustration:

Go Gettum and Don Delay, both 25 years old, each invest $3,000 a year in their IRAs. The funds grow at 10% a year.

Gettum begins right away, at age 25. He invests for only 8 years until he reaches age 32. At $3,000 a year, his contributions total $24,000. He then stops contributing and lets his IRA continue growing without adding to it. (This is called "freezing" the IRA.)

Delay waits. Instead of beginning his contributions at age 25, he starts at age 33. He adds money to his IRA for 33 years, retiring at the end of his 65th year. At $3,000 a year for 33 years, Delay contributes $99,000.

Gettum invests $24,000 in 8 years. Delay invests $99,000 in 33 years. At retirement, Delay has more, right?

Wrong! At 65, Gettum has $876,400. Delay has only $733,400. That's $143,000 less.

Gettum ends up with more because he started earlier. Even after Gettum stops his contributions and Delay begins, Gettum's account still grows more every year. Delay's account falls further and further behind.

In the final year, Gettum's account grows by a whopping $79,000 - three times more than the total he contributed in the first place. Gettum doesn't even have to do much about it except move his eyeballs to read the account statements.

Each year, the current year's growth adds on to the previous year's balance. The longer the money remains at work, the better. After 25 years, compounding begins paying off big.

Here's a helpful analogy: When a carpenter saws wood, he doesn't press on the saw. He just makes sure the saw remains in contact with the wood and lets the saw do the work.

Don't work too hard at your investments. Never mind moving your money hither and yon in an effort to catch big short-term profits. Just buy different types of index mutual funds or exchange-traded funds and hold. Let time and compounding do the work.

Some people are in no position to invest at age 25. Their income is on the low side, but they're starting families and buying big-budget items like houses and cars. If you're treading water as fast as you can to keep your nose above the financial waterline, do whatever's necessary to keep breathing.

But as soon as you can, let the magic of compounding start working for you. Make regular investments and keep reinvesting the earnings. The earnings for each period will add to the balance for the previous period. Over many years, you'll come out a big winner.

One of every eight Americans owns bank or investment accounts they've forgotten about. Does this include you?

If you fail to make a deposit or withdrawal for a certain number of years, the funds "escheat" to the state. The state spends the money as it pleases.

I'd rather you spent it as you please. To refresh your memory about forgotten accounts, see www.naupa.org, the website of the National Association of Unclaimed Property Administrators.

If you expect loyalty from a stock, you're looking for trouble.

Let's say a stock initially performs well. You become emotionally attached to it. Its success boosts your image.

But if and when the price goes down, you suffer a painful blow. You feel as if the stock has been disloyal to you. You therefore want to get rid of it as quickly as possible and reject it from your life.

Unfortunately, the decline proves only temporary. The stock's long-term promise is undiminished. You sold too soon.

Stocks don't know loyalty from a baloney sandwich. That loyalty business stems only from your needs and your feelings. Feelings can damage your investment results.

If you need loyalty, buy a puppy; it'll give you all the loyalty you could want. But don't sell individual stocks too soon. Plan on holding them for at least five years. Let 'em season.