Many of us are tempted to wait for a windfall—winning the lottery or a big inheritance from Aunt Phoebe—before we even start to invest. Our hopes are high because we’ve heard stories of people who hit it big, but those stories are in the news because they’re so rare, not because they’re commonplace.
The best way to develop a substantial nest egg is to develop the discipline of putting money into a fund every month—no excuses. The market will go up or down, but our funds continue to grow slowly and steadily. I know people who began putting as little as $25 a month into an investment, and over time, they’ve accumulated a substantial amount of money.
When they were young, they had every reason to put off investing because they could easily use that $25 for dinner and a movie. But they were committed to save and invest, even if it was a small amount. When they got promotions and raises, they increased the amount they put away each month.
To explain the benefit of regular investing, I use the illustration of a farmer who invests each month in his favorite commodity: Cows.
Farmer Joe calls me and wants to invest $100 each month. When he begins, the market for cattle is near an all-time high. Cows are selling for $100 a head (which actually includes the entire cow, not just the head in case you’re watching Netflix while you’re reading this…).
He wonders if this is the right time to invest, but he needs more cattle.
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The first month, he can buy only one cow.
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In the second month, the price of cattle goes down to $50, so he buys two.
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The third month, the price goes to $25, so he buys four that month.
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And in the fourth month, the price of cattle plummets to a low: $20 each.
At that point he calls me and says, “Hey bucko, what have you gotten me into? Cattle are $20 a head! I bought all these cattle at high prices, and the bottom has dropped out of the market! I’m going to sell them all and cut my losses.”
I tell him confidently, “Farmer Joe, the market is very low right now. You were paying $100 a head four months ago.
You needed cattle, didn’t you? Has that changed? No? So why are you upset?
This is the best time to buy cattle, not sell. Hang in there.
You’re in great shape to benefit from this phase of the cycle.”
Farmer Joe bites his lip and decides to trust me.
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The next month, the price creeps up to $25 again. Farmer Joe buys four head.
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The next month, the price has risen to $50, so he buys two, and
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The next month, the price of cattle is back up to its high of $100, and he buys only one head.
At that point, Farmer Joe decides to sell. During those seven months, he bought nineteen cows for a total of $700. They’re worth $1900, yielding a net profit of $1200, and the price of cattle never rose above $100 a head.
