Does Your 401(k) Tree Feel Like a Sapling?

You may have heard of the doubling penny example.  People were asked whether they’d take a million dollars now or take an amount equal to one penny doubled every day for 30 days.

It may not surprise you that most chose to take one million dollars now, however, those who chose to take the penny would have about 5.3 million dollars after 30 days.

This is a powerful illustration of the principle of compounding interest.  It’s unlikely for an investment to literally double every day, but compounding growth can have a significant impact on even small amounts.

Getting Used to Boring

However, there’s a big problem with this illustration.  It’s not a mathematical issue, it’s behavioral.

The problem is you need to be willing to stick out the 5, 10, 15 days of “ho-hum” results before you really start to see the big returns.  Illustrating the table as a graph shows this more clearly.

While this example shows compounding over a period of days, with investing we’re typically dealing with larger time horizons.  Waiting 5, 10, or 15 years for similar results can leave a lot of investors at their wit’s end.  But that’s precisely the time to stay the course.

A growing tree works the same way.  Ten years in, the tree is still a “juvenile” by tree standards.  Anyone doing a visual inspection of their tree’s growth week after week will be disappointed, akin to watching grass grow.

When you think about growing your 401(k), it’s crucial to think of it in context of the growing penny.  The ultimate challenge is to stick to it in over long, drawn-out periods of apparent boredom (and even setbacks) so that the future size can be realized.

Time and patience, in this regard, are incredibly valuable assets.

Seedling, Sapling, Tree

Next time you see a large, full tree in your neighborhood or yard, remember that each tree starts as a seed, then a seedling, then a sapling.  The process to reach the full, mature phase takes decades of tending, watering, pruning, and nurturing.  

This is your opportunity for deliberate, consistent, and patient investing towards retirement.  If your 401(k) looks like a sapling, remember that time and patience can be on your side.