Column by Jack Ryan
If you believe that life-changing wealth and financial security is way beyond your reach, here’s a story that says otherwise. For young people, these lessons are important.
A financial columnist for The Washington Post recently learned about the $264 million Roth IRA account of Ted Weschler, a 60-year-old who evidently has made a lot of superb investments over nearly four decades. The columnist contacted Weschler, who shared the details of how he did it.
Now, retirement account of that size truly is far beyond almost everyone’s reach. And Weschler clearly knows a lot more about business than the average retirement fund owner: He has run both a leveraged buyout investment fund and a hedge fund that produced 22% annual returns for 11 years. Today he works for Berkshire Hathaway legend Warren Buffett, searching for companies in which to invest or buy.
But the early years of his retirement account involved a lot less money. Here’s Lesson No. 1: Time and patience are part of what made this relatively small amount of money much bigger.
In Weschler’s first job, he made the maximum allowable contribution to his 401(k) account, along with matching money from his employer. At the end of six years, 1984-89, the account was worth $70,000. Of that, $34,000 came from his contributions, $12,000 was employer matching money, and the remaining $24,000 was investment gains.
After leaving that job to start the buyout fund, Weschler clearly put a lot more money into his various retirement accounts. It also had to help that he was working in a field that involved researching companies, which helped him find excellent investments. Few have such an advantage.
In the 29 years after leaving his first job, from 1990 to 2018, the $70,000 from his original 401(k) had grown to $58 million — about one quarter of his total retirement savings.
Lesson No. 2 is for most of us — people who aren’t as knowledgeable about investing as Weschler is. He said that index funds, which are designed to match the performance of well-known market barometers, can work very well.
For example, anyone with a $70,000 retirement account in 1989 who put it into the Vanguard S&P index fund and left it there would have had $1.6 million in June 2021.
You get the same kind of growth with smaller numbers. A $7,000 account in the same Vanguard fund over the same period would have become $160,000 this year.
This buy-and-hold strategy sounds easy. But it’s not. Markets have been hammered twice in the last two decades: the dot-com bubble in 2000 and the Great Recession in 2008. It takes nerves of steel, and confidence in the future, to hold on through huge downturns like that.
Recoveries from big losses also prove that the long-term direction of the American economy is upward. You need neither be wealthy nor a financial whiz to plan for your future. But you do need to start early and put as much money as you can into a retirement account.
Jack Ryan, Enterprise-Journal
