I really don’t think I can emphasize enough the value of time to a successful wealth creation process. Money multiplies over long periods of time, and it does so exponentially. In other words, the longer you have to leave your money invested, the faster its pace of growth will accelerate. How?
They used to call it “compound interest”. Of course, in today’s near zero interest rate environment, using the word “interest” when talking about compounding is absurd. Therefore, I just call it ‘compounding’ or ‘compound returns’. Whatever you want to call it, it is the holy grail of investing.
Compounding is the concept that money earns a return when invested, and then the returns earn a return. Then those returns earn a return. The snowball grows and grows over time until you created incredible amounts of wealth from your original investment. The ticket though is patience and steadfastness.
Allow me to illustrate with some examples. See below the chart for the S&P 500, which is an index of the largest 500 companies in the United States and their stock prices. This chart goes back to January 1981, and starts at 134.77, 40 years ago. The close on January 15, 2021? 3,768,25! This implies an average annual return of 8.7%.
This is pretty close to the average returns from the index for much longer periods than 40 years as well. Now, as you can see there have been some nervewracking events along the way. Major dips after the tech bubble burst in 2001, the sub prime mortgage financial crisis in 2008 and most recently a very short dip for Covid-19. Each time the index recovered and continued powering upwards. It’s important to keep this perspective when these events occur and look at them as opportunities to invest at discount prices. Corporate America isn’t going anywhere!
So let’s assume you’re the average investor. You put away 10-15% of your income, and you’re smart by putting it into an S&P 500 Index fund ETF which has next to zero management expense fees. Therefore, the full 8.7% return goes to you. This is the advantage of index ETFs over actively managed mutual funds which can have management expense fees of over 2%!
For those of us who are visually inclined, see the below chart which shows the multiplier effect. Especially of note is how much faster the growth is in the later decades. This is because the growth is coming from the returns of so many previous years.
This is why I say its so important to start putting money to work as soon as possible. Set up a small trust fund for your kids when they are born. It will grow over 200x its original capital by the time they retire without putting in any more money, ever. Get summer jobs if you’re in high school and put it all towards investments. I made the mistake in my teenage years of spending my summer job money on stuff, video games, CDs (remember those?), eating out, movies and so on. Imagine if I had put those thousands of dollars in the S&P 500 20 years ago… I would have tens of thousands of dollars by now and it would still be growing.
The Bottom Line
Time is your ally when it comes to investing and growing your wealth. The more you can put into investing as early as possible, the wealthier you will become over time. While others are spending money on frivolous “immediate satisfaction in the present” expenses, put your money into the market and forgo present day pleasures for long term wealth. You’ll retire sooner and richer than all of your peers.
OK, one last chart to end the post. This one’s incredible. If this doesn’t get you investing early, nothing will.
Now get to it! Cut expenses, earn more income and put it all into investments. This is how you’ll achieve financial freedom as quickly as possible. Be patient, be confident in your approach and leave that money to grow while you sleep!