Time and investment

Time is the coin of your life. It is the only coin you have, and only you can determine how it will be spent. Be careful lest you let other people spend it for you - Carl Sandburg.

Time is more valuable than money, you can get more money, but you cannot get more time - Jim Rohn.

Time is money says the proverb but turn it around and you get the precious truth. Money is time - George Gissing.

These are popular quotes with different opinions but same basis on time and its relationship with money. When people talk about investments, you hear them mention key things like risk, price of the investment, security, probability etc.; but the most important of them all which is mostly missed is TIME!

Time here will basically be referred to as the tenure or period for holding an investment. Understanding the role of time in investment as a Ghanaian is very important.

Let us assume you are investing to finance an educational program or course in the next 5 years, in such case it will be best to invest in products like fixed deposits.

These funds usually have lower rates, however, returns on them is assured. Most Banks in Ghana offer this form of investment. A question anyone will ask is, why wait for 5 years on a low rated investment?

There are two simple answers, first you are assured of positive returns over a 5-year period due to the incidence of low risk. Secondly the effect of compounding interest is seen over time, earning interest on interest.

This same concept is seen in long term investments towards events like your retirement. Here it is advisable to invest in mutual funds and equities.

Investment towards an event like retirement require more time, and the earlier you start, the better your chances are of making millions of cedis over two decades.

The time horizon is much larger and investing in equities or mutual funds can yield higher returns because market unpredictability neutralizes over a longer period.

Satyen Kothari, Founder and CEO, Cube Wealth once said “Time is the most critical aspect of investing. Understanding one’s personal time horizons and the ability to stay invested for the longest time possible allows the magic of compounding to make you rich.”

Good investment is not necessarily about who hits the highest returns because the highest returns is not a usual occurrence that can easily be repeated. A good investment is one that earns positive returns that can be repeated over time for a long period; this is where we see the astonishing effect of compounding interest, and this only happens because of TIME!

It is never too late to start an investment. Let us take an example considering all things being equal:

Two sisters (A & B) of the same age at 30 decide to invest towards retirement so they can purchase their dream houses, cars, and travel around the world.

They have plans to retire at age 60; meaning they have 30 years to make this dream a reality. Now let us be prudent enough to take interest rate at an average risk-free rate of 15%.

Sister A immediately starts the investment with GHS 500 and with the intention of making monthly payment of GHS500, meaning this will be the trend for the next 30 years.

In 30 years’ time, Sister A will have about GHS 2.6 million. Sister B on the other hand start hers with same GHS 500 and monthly top ups of GHS 500. She starts this at the age of 35, 5 years later than her sister so she has 25 years to make the dream a reality.

She will make an estimate of GHS 1.2 million at the age of 60; about GHS 1.4 million less than her sister. Even if she starts with GHS 800 and a monthly contribution of GHS 800, she ends up with about GHS 2.1, still less than her sister.

Sister A has acted smarter than sister B because she took the benefit of time which comes with the compounding interest effect. Even with increased contribution, Sister B was struggling to catch up with Sister A.

That is the time factor. A penny today is worth a million in the future over time if invested earlier.

Renowned investor like John Bogle, Bill Gross, Warren Buffet, Benjamin Graham, and the Thomson & Desmarais families all followed the time principle which has seen them become financially successful.

The effect of time on your investments is something you must understand before you can appreciate all other factors.

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