This post first appeared on Right About Money.
The Dow has been setting record highs regularly this autumn. But it remains an awful long way from one million. Then again—maybe not so long after all, Warren Buffett suggests.
With nothing more than historical average annual returns the Dow, which recently crossed 23,000, will hit 1,000,000 in 100 years. That means a child born today has a good shot at seeing that milestone fall. Life expectancy at birth is in the high 80s, but continually expanding. Half of all newborns in industrialized countries will live past 100, scientists believe. The first human that will live to 150 has already been born, actuaries say.
Why does this matter? Buffett is a smart guy. But even he would say that patience played a bigger role than smarts in building his fortune. His ideal holding time for a stock, he has said, is forever. Such is the allure of compound growth.
In the Wall Street Journal, Buffett points out that the Dow has climbed 5.8% annually over the past century. For it to hit one million by October 2117, the market would need to return just 3.9% a year, on average. That’s not only doable; it’s likely.
You and I won’t be around in 100 years. But some of today’s children will be—and even for those of us who are older the same lesson applies. Compound growth over many years—20, 30, 50—works miracles. But you have to own assets that grow.
Dow one million is a great way to introduce to your kids the difference between saving and investing. Not spending everything you make is step one. That’s saving. Where you put that money is investing. Understanding the difference, and getting comfortable with the near-term risks of growth assets like stocks and real estate, are key concepts that should be part of any financial education curriculum.
The basics of saving and budgeting are important. But investing is how you reach long-term financial security. The big idea that the Dow will reach one million in your child’s lifetime is a great way to grab their attention. Children aren’t likely to relate to a discussion about retirement. But give them an eye-popping target like Dow one million—and the pixie dust of Buffett’s brand—and you just might plant a valuable seed.