Much has been made recently about the story of Grace Groner.  For good reason.  If you're unfamiliar, Ms. Groner died last week at the age of 100.  While working at Abbott Labs, she bought 3 shares of stock in 1935, reinvested the dividends, and lived within her means for the rest of her life.  That investment is now worth $7 million, which she has donated to her alma mater.

There are a couple of interesting story lines associated with this.  Most of them center on frugality and charity.  Again, deservedly so. This is a great lesson in both.  Although she doesn't perfectly fit the mold, Grace Groner's behavior would have made her a good subject for Thomas Stanley's The Millionaire Next Door series.

There are a couple of other vectors here that are interesting, though.  In his Wealth Report column, Robert Frank highlights one of them, which involves the power and risk of putting all one's eggs in one investing basket, especially when that basket belongs to your employer.  He points out that luck played a big role here.

In reality, though, if she had invested in the broader market, she would have enjoyed impressive returns as well.  But how impressive?  That is the story line that is most instructive, and it involves the power of compounding, which is coincidentally a favorite topic of this blog.

Let's look at some data.  In 1935, stocks were up 46.74%.  That's a nice way to launch a long-term investment.  The next year, the market was up 31.94%.  In other words, if Grace Groner would have invested in a broad stock index fund on January 1, 1935 (had they existed then), she would have almost doubled her money after two years!  Of course, the market is a volatile beast, and 1937's 35.34% drop was undoubtedly a good reminder.  Nonetheless, from 1935 through 2009, the average broad stock market return was 12.23%, according to the Federal Reserve's numbers.  What was Grace Groner's return?  By my calculation, it was just under 15.4%, with full reinvestment of dividends, etc.  That is what allowed Ms. Groner to donate $7 million to Lake Forest College.

But what about Robert Frank's assertion that luck played a huge role in her investing success?  How much would she have been able to donate to Lake Forest if she had instead been able to invest in the broad market for 75 years? $919,042.85!  In other words, the difference between a 12.2% and a 15.4% per year average return on a $180 investment for 75 years is more than $6 million and almost 87% of the final value of the investment.

That leads me back to two fundamental points:  1) the power of compounding cannot be overstated, and investing early is a huge advantage if one is hoping to build wealth, and consequently 2) finding inexpensive investment vehicles makes a huge difference, provided the associated returns are similar.  If Ms. Groner had paid 100 basis points, or 1%, for management of her Abbott investment, she would have ended up with a bit less than $3.8 million.