Another take on “A tale of two investors”

Posted by on February 2, 2010 @ 11:37 am in Investing

A few readers had some strong reactions* to my recent post on the benefits of making investment purchases at the beginning of the year, as opposed to waiting until year-end.

Some folks doubted my premise. Others questioned my math. And some thought the whole post was laughably basic. Well, I agree that the post is about a very basic concept. But that doesn’t mean it’s not essential for investors to grasp. In my experience, many people don’t immediately realize that making contributions to a retirement account at year-end rather than “year-start” has the same consequence as forgoing a full additional year of compounding on the entire nest egg. While some may see giving up 7% of $2,500 each year as relatively trivial, giving up 7% of $158,000 (the ending account balance for “Investor B” in my example) may be another matter.

So I’ll stick to my guns, and I’ll reiterate my central point: If you care about an investment cost differential of 50 basis points, you ought to care just as much about maximizing the value of compounding by making long-term investments such as IRA contributions as early as you can, especially if your funds are otherwise going to sit in a money market or bank account.

Some preliminary research I’ve seen recently leads me to suspect that a lot of people—more than you might think—have money sitting around that could be working on their behalf, but they end up waiting to invest the money until the last minute. IRA owners, for example, often wait until April 15 to make their contributions, even if they could have done so months earlier.

Of course, there can be perfectly rational reasons for such behavior, as noted by other readers in their comments. But I suspect that often the real culprits are simply procrastination and a failure to appreciate the true cost of delaying—even if the concept is understood. I’m not pretending it’s rocket science!

If, like a lot of folks, you’re inclined to say “I’ll get around to investing eventually,” I hope this nudges you to get to it sooner rather than later.

* We weren’t able to publish all of the reader feedback we received on this post. Please read our guidelines before submitting comments.

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