<THE FOOLISH FOUR>

Foolish Four Report
by Robert Sheard

LEXINGTON, KY. (April 21, 1998) -- Procrastination is probably the single biggest obstacle to wealth creation. Young people frequently ignore the immense power they have with time in their corners. It's a silly cliche, perhaps, but nevertheless accurate: The best time to begin saving and investing was yesterday. The second best is today, the third best tomorrow.

Let's look at a more tangible example of that power. Joe and Freddy (or Thelma and Louise) are the same age (let's say thirty). They make the same amount of money, have the same financial obligations and the same opportunities. Ready Freddy decides to start saving and investing today. Slow Joe assumes there's plenty of time for that down the road.

Freddy opens a Roth IRA with $2,000 and adds another $2,000 to it each year. Assuming he gets an average return of eighteen percent (remember, in a Roth IRA, taxes are not an issue), after ten years, Freddy's got a portfolio worth $55,510. At this stage Freddy suffers a brain-melt and decides to quit adding new money, but at least he leaves what's already there invested in the Roth IRA.

Joe's now getting worried and starts his own Roth IRA in an identical investment (that is, he earns eighteen percent a year). But to make up for lost time, Joe's going to add $2,000 a year for the next twenty years, twice as much as Freddy invested in his IRA.

When the boys turn sixty and retire, have any idea which one's got the bigger smile?

Slow Joe has invested $40,000 over the years, but started a decade after Ready Freddy. At the end of the thirty-year comparison (only twenty of which saw Joe actually invested), Joe's portfolio has swollen to $346,042. Not bad, especially as it's completely tax free, but he'll not be buying any beach-front property.

Freddy, on the other hand, only invested half as much as Joe ($20,000), but was invested the entire thirty years. His portfolio after thirty years? <fanfare, please> $1.5 million!

Freddy ends up with more than four times Joe's portfolio in the same type of account, simply because he started earlier (and despite the fact that he invested half as much). What's worse for Joe, he can never catch up as long as he and Freddy invest in the same stock strategy. Joe can add $2,000 a year for the next one hundred years (yeah, right) and Freddy's portfolio will still be larger.

Now whether you think eighteen percent is an appropriate number to use or not, let me say that it doesn't matter much what realistic constant return you apply. The difference between their portfolios is nothing more than the value of time and the beauty of compounding. If you find yourself saying, "No big deal. I'll make sure and start that Roth IRA next year," get your spouse or neighbor to administer the dope-slap and get on with it.

Current Dow Order | 1998 Dow Returns

[Robert Sheard is the author of The Unemotional Investor (Simon & Schuster, 1998) available now at Amazon.com and soon at your local bookseller.]

TODAY'S NUMBERS
Stock  Change   Last 
 -------------------- 
 UK   ---       51.25 
 IP   +1  7/8   55.19 
 MO   -   9/16  39.44 
 EK   -1  1/2   71.94 
 
 
                    Day   Month    Year 
         FOOL-4   +0.14%   6.71%  13.97% 
         DJIA     +0.47%   4.38%  16.14% 
         S&P 500  +0.24%   2.23%  16.07% 
         NASDAQ   +0.89%   3.71%  21.24% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  289 Int'l Pape    43.13     55.19    27.97% 
  12/31/97  291 Union Carb    42.94     51.25    19.36% 
  12/31/97  206 Eastman Ko    60.56     71.94    18.78% 
  12/31/97  276 Philip Mor    45.25     39.44   -12.85% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  289 Int'l Pape 12463.13  15949.19  $3486.06 
  12/31/97  291 Union Carb 12494.81  14913.75  $2418.94 
  12/31/97  206 Eastman Ko 12475.88  14819.13  $2343.25 
  12/31/97  276 Philip Mor 12489.00  10884.75 -$1604.25 
  
  
                              CASH    $415.96 
                             TOTAL  $56982.77