I do love using children’s parables to illustrate adult principles. One that I go to often is the age-old story of the tortoise and the hare. I’ve always loved this children’s tale, although I do find it riddled with peculiarities.
For instance, would a hare really beat a tortoise in a race? Who refers to a rabbit as a hare — honestly, I’ve never uttered that word for a rabbit except in relation to this book. Sometimes in life, isn’t it better to be the hare? Like watching my middle daughter, Bella, get ready for school? And finally, come on, who doesn’t want to be the fastest in a race and couldn’t the hare simply get the biggest lead and then walk at a tortoise pace to the finish line?
Anyway, you’ve heard enough about this story. Now, how is it relevant at all to the adult in us all and our investment strategy? Or asked differently, is it better to be the tortoise or the hare when it comes to investing? My answer is: both. Let me elaborate, as I use this analogy all the time with clients.
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I tell people when it comes to investing it is a marathon and a sprint, or you have to be the tortoise and the hare. You see, there are two huge fundamental principles when it comes to investing, in my opinion: the power of time (tortoise) and the power of compounding (hare).
The tortoise and the power of time
I’ve written about the impact of time on your investments. The longer you can let your money grow, the more magically, the eighth wonder of the world — compounding — will work. For instance, a 10% return is great if you get it once, but if you can average it over 7.2 years, your money/investments will double just like that. I make this comment to clients when I want them to understand the importance of investing now and consistently over time.
Sure, you can wait 10 years to start investing, but you would miss the magic of the tortoise. You would not benefit from the consistent compounding effect your investments could have. Maybe you’ll feel better because you are debt-free 10 years later before you start investing, but you’ll have missed and really can’t get back that opportunity.
The hare and the power of compounding
I then go on to tell clients that you can see how important the tortoise is for their investment portfolio and financial freedom, but where does the hare come into play? Basically, the more money you can front-load, the more magical compounding can be.
Hypothetically, if you started with $1,000 in investing and didn’t put in another dollar, at a 10% return, your money could double four times by retirement. Thus, your thousand-dollar investment would turn into $16,000. Not bad, right? But what if you were able to start with $1 million and never put in another dollar? Well, simply put, you’d have $16 million.
You can start to see where I am going with all this and how you truly need both of these factors, the tortoise and the hare, to be successful in investing. I try to espouse the benefits and urgency to invest as much as you can as soon as possible. This will afford you the benefit of both time and compounding.
To further make the point
Let’s say you hypothetically waited the past two years to invest because 2022 was a bad year in the markets. In that scenario, you would have missed out on your money increasing close to 40%! Said differently, if you had only $1,000 invested, you would now have $1,400, vs the individual who had $1 million invested and now has $1.4 million. Just a small difference, right?
I know I am using extremes, but I always find that is the best way to make a point. I certainly recognize that most of us at 25 years old don’t have the luxury of having $1 million to invest. That said, the more you can front-load our investments, along with the more time you can let them do what they do best, the better off you will likely be.
If nothing else, I am hoping that maybe this can help you adjust your thought patterns or tendencies. Perhaps that extra $50,000 sitting in your cash account should be deployed now, or maybe instead of trying to pay off your car early, you could start putting small amounts of money into your investments instead.
There are millions — perhaps a slight exaggeration — of ways these two concepts can simply and effectively shape your investment mind frame. So, next time you are asked about your investment philosophy, tell people you invest like a tortoise and hare.
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