Market Traders chase performance every hour and minute of the day. High Frequency Traders chase performance every second or fraction of a second of the day. Patient Investors stay calm and allow mathematics to do a big chunk of the work.
Mathematics is not about having an opinion or taking a view. There is no debate. Plain and simple: 1 + 1 will always make 2!
Think about pushing a snowball downhill. What happens is that it just gets bigger and bigger. The snowball compounds as it travels downhill.
When you make an investment the effect of compounding is the same. If you invest $ 10,000 at say a modest 4.00% annual return, by the end of year five your $ 10,000 is now worth $ 12,209.97. Stay invested an extra five years and your $ 10,000 is now worth $ 14,908.
Now add a monthly contribution of $ 300 a month with the same modest annual return of 4.00%. After 5 years your $ 10,000 is now worth $ 32,099. Keep paying for another five years and your $ 10,000 plus $ 300 a month is now worth $ 59,083!
All too often investors become obsessed with performance, negative or positive. Should I sell now? Should I buy now? Today we receive an avalanche of daily financial information which often contradicts itself. It can get very confusing. What is important is to invest and to stay invested and yes, whilst there will be some turbulence along the way, the best thing to do, is to do nothing at all and stay invested.
A combination of patience and compounding has worked very well for arguably the most experienced investor alive today, Mr Warren Buffet. “Compound interest is such a powerful yet neglected idea, that Albert Einstein famously called it “the eighth wonder of the world”. Over the medium to long term, you can just let the maths do the work!
Author: James Greco