"Trust in time, not timing."  I didn’t coin that phrase, but I use it because it’s one of best pieces of advice I’ve heard.  It means that the key to building wealth is to save and invest consistently over time, not to try generating superior returns at the 11th hour through “timing” the market or stock-picking.

“Trusting in time” works because of the magic of compounding – making money not only on what you invested, but also by re-investing the gains you made to earn even more.  An example illustrates the magic of compounding.  “Sue the Saver” saves $1,000 per month starting at age 25.  By retirement, assuming a 7% average return per year, she will have $2.6 million.  “Kurt the Consumer” starts 20 years later, at age 45.  To have the same retirement savings as Sue at age 65, Kurt must save and invest over $5,000 per month – 5 times what Sue has to save, just to get even.  Put a different way, Sue invested a total of only $480,000 over 40 years but built the same retirement nest-egg as Kurt, who started at age 45 and had to save $1.2 million just to get even with Sue.  That’s the magic of compounding.  The takeaway is clear: start saving now, and be consistent.  Trust in time.  If you’re already past 45, all the more reason to start now, rather than waiting further.

And what about timing?  Can’t we just invest our money with an investment professional that can beat the market?  Study after study demonstrates that few investors consistently beat the market.  Here’s the latest proof, from the front page of last Friday’s Wall Street Journal.  Hedge funds, supposedly the cream of investors, had a good year in 2010, generating an average return of about 10%.  But the US stock market – probably the best comparison – had a 17% return, including dividends.  Yet again, if investors had bought a low-cost index fund that tracked the market instead of investing with the “experts”, the investors would have done better.

Time, not timing, is of the essence.