Here is a graduation gift you can give to a young person this June that won't cost you a penny but might lead to a fortune for the recipient.
It is the gift of the investment value of time.You seldom hear about time when you talk to brokers. They are more concerned with yields and dividends and the ability of a stock to double in three to five years.
When time is mentioned at all, it might be in reference to how a stock has risen in the months since it was recommended. As conceived by most brokers and gurus, time ranges from tomorrow to maybe a year from now.
The time that is of value to a young person, however, is an adult lifetime of several decades at least. Over that period, even a rather small annual rate of return can compound into a sizable sum.
Ah, but it takes lots of time, and time is not highly valued by a world in which some small stocks leap 25 percent in one day and others double within a month and even triple before a year has run its course.
It is difficult to peddle a long period of time as an element of investing. Brokers make commissions on transactions, so they can't wait a lifetime between transactions. They want traders, not patient waiters.
Besides, what young person can appreciate time when he or she has so much of it to consume?
But time is money, if only because time means compounding, which can produce amazing results.
Here is an example, drawn to the extreme for illustration purposes:
If you had a job offer of $1,000 a day for 35 days, or a penny a day on the first day, with the sum doubled every subsequent day for the same term, which would you choose?
A sum of $35,000 is an excellent return, of course, but it would be nothing compared with the nearly $350,000,000 that the second choice would produce.
Nobody expects to double his money every day. But 15 percent a year is possible, if perhaps not likely, and at that rate you can double your money in less than five years.
Assume the young person begins with $1,000 at the age of 21 years. By age 26 the sum has grown to $2,000, by age 31 it is $4,000, by 36 it is $8,000, by 41 it is $16,000.
By age 66, the sum is $512,000. You can correctly say, however, that no provision was made for taxes on dividends and that when the final amount was withdrawn there would be capital gains taxes to be paid.
But sensible people know by now that nothing will fully insulate them from the taxman or inflation. So cut the amount in half, even to a quarter, and ask yourself if the sum isn't worth waiting for.