I’m reading a book right now that talks about Warren Buffett. Some say he is a great investor. Others say that perhaps he has just been extremely lucky. Or perhaps he is just an old investor (he’s been investing for a long time!). I think Buffett has a good bit of all three: Investment skill, luck, and age/time. Consider the following example to see how an “old” investor can end up with more wealth than another investor who has higher returns:
Investor A starts investing when he is 15 years old and invests $10,000 per year and earns an 11% return over his lifetime. He loves his work/job and so he keeps working until he is 85 years old (70 years of investing).
Investor B starts investing when he is 30 years old and retires early at age 60 (30 years of investing). He also invests $10,000 per year but earns 30% per year on his investments by taking wild risks and somehow not losing all his money.
Who do you think ends up with more?
Investor B would end up with about a $87 million portfolio (assuming he earned 30% per year – not something that is realistic in my mind) at his retirement date.
Investor A would end up with about $135 million portfolio at retirement by investing in a diversified portfolio and staying in the market for 70 years.
Moral of the story: You don’t have to hit a grand slam every year. It’s most important to stay in the game and allow your wealth to compound over time. Warren Buffet is a great investor; however, he is also still playing the game at age 92 and started at a very young age!