Watching The Antiques Roadshow

People do not intuitively understand exponential growth. That fact alone makes it difficult for financial advisers to deal with them. Even the advisers who themselves understand exponential growth have trouble. Failure to understand compound interest, coupled with impatience leads to profoundly bad results.

For example.

On the Antiques Roadshow, I recently saw a painting acquired in 1958 for $88 which had grown in value to be worth about $90,000 today. A breathtaking investment!

Not so much.

A thousand times your investment in 55 years is an annual rate a little over 13% and while that is very good, it is not breathtaking.  13% generates huge numbers, but not very quickly.  That is the flaw for most of us.

We are a linear species. We don’t understand growth curves.

The unfortunate decision making reality for we exponentially challenged is that 13% would turn $88 into just $298.72 after 10 years.  It was worth only a little over $1,000 in 20 years, and not quite $3,500 after 30.  Nice 13% growth, but that wait and the absolute value in money will not turn the crank for a large share of the people.

Impatience is a killer of otherwise good planning.  It can be overcome with above average discipline and computational skills.

If the rate is not visible enough to keep you from discontinuing a good tactic, then you will need to learn to do some arithmetic.  As we see above, the answer is not compelling quickly enough to keep many people involved.  Many people might have quit by year 15, but if they had done the arithmetic, most would have stayed.

The intuition requirement is the effect of time.  In the example, 13%, 55 years, about half the dollars appear in the last 5 years.  People are just not conditioned to see that.

What does that mean.  That means unless you are highly disciplined and always do the calculation, you need to operate on faith.  You don’t understand it exactly, but you trust the process.  It is like golfers talking about trusting their swing.  They could not tell you the details but they know if they just let it happen, it will.  (Well for me, sometimes)

Long times matter and you must learn to believe that.

That’s why you cannot wait until you are 60 to start saving money. Unless, of course, you expect to live to 115 and still have something to spend the money on.

Your intuition will fool you. If it looks exponential, or worse still, probabilistic (more on that tomorrow), do the arithmetic or buy a spreadsheet program or a financial calculator.  If you email me (address below) I will send you some formulae that will work in a spreadsheet.

Be patient, planful and persistent. That will work.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

6 Comments on “Watching The Antiques Roadshow

  1. Thanks for posting this. I’m a financial advisor too and I sometimes find it’s like pulling teeth to get people to understand this concept, especially the 24-40 crowd who think they have all the time in the world to get started.

  2. Pingback: Compound Interest – Yet Again | moneyFYI

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