Have you heard the one about water lilies multiplying in a pond? Most seasoned investors can probably fill you in.
While the water lily story has been trotted out on more than one occasion to demonstrate the mathematical concept of compounding, far be it for me to reinvent the wheel when there’s already a perfectly good one at hand.
So here’s my abridged version of the water lily story to demonstrate the powerful concept of ‘time’ equaling ‘money’ and the opportunity cost when you fail to best use your time as an investor.
The multiplication effect
A water lily set adrift in a pond multiplies over time. I won’t go into a lengthy botanical explanation of the process, but the fact is, one becomes two, two becomes four, four becomes eight, eight becomes sixteen and well, hopefully you’ve got enough mathematical ability to follow where this is going.
Given that larger and larger volumes of water lilies are doubling over time, although it might take four years (or 48 months) for the lilies to cover 12.5% of the pond’s surface, it will only take another month until it covers 25%.
Then before you know it, within the next two months the entire pond surface has succumbed to a full saturation of water lilies.
See how rapidly compounding can suddenly take on a life of its own and magnify that multiplication effect in the blink of an eye?
Half of those lilies staged a four year campaign while there numbers slowly and steadily grew to cover 50% of the lake, until the very last month when the same rate of growth occurred in just four or so weeks, and took over the other half of the pond.
Opportunity cost
Now consider what would have happened if that initial lily was planted just one month later. This is what investment advisers refer to as ‘opportunity cost’, and the impact is twofold: it’s the loss of not just the doubling effect in that first month from one lily to two, but also the final doubling effect in the 51st month, to cover the entire pond.
You can see how significant the opportunity cost could be if you procrastinate and fail to take affirmative action in securing your financial future.
The investment window
Logically, if the effects of compounding work over a number of years to grow your portfolio’s value, the more time you hold your assets, the more they’ll be worth when it most matters – when you need to draw a retirement income.
But some people, for whatever reason, don’t begin their investment career until later in life.
While a few forward thinking souls might start setting goals, and developing and implementing investment strategies in their early twenties, others wait until they hit the mid-40 mark and realise they’re not actually immortal.
But the longer you delay investing, the less time you’ll have for compounding to do its thing and therefore, the more you’ll need to contribute to make your money work harder and faster.
Act as soon as you possibly can
No doubt there’ll be a few readers out there who’ve been giving serious thought to getting into the market. Credit is still ridiculously cheap, even with APRA spoiling all the banks’ fun, and property continues to prove its worth as a very stable and strong, high growth asset (when properly selected).
Whether fear bred from the various headlines about housing market instability, or some other obstacle is holding you back from taking action, it’s critical to recognise that for every month you’re not in the market, you’re paying an opportunity cost that could eventually equal hundreds of thousands of dollars.
Every day you delay taking the first step or the next step, you shorten your investment window and in turn, your wealth creation journey.
Your overall objective as an investor should be to remain active in the market for as long as possible, because procrastination can and will inhibit the creation of a viable retirement fund and prevent the realization of your future financial goals.
If you’ve been thinking about building your own property portfolio, or adding to an existing asset base, one of the team here at Trilogy Funding can help get you started. Don’t miss your investment window. Click here to connect with us today.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).