“Time is your friend; impulse is your enemy. Take advantage of compound interest and don’t be captivated by the siren song of the market.”
– Warren Buffett
If you had invested $10,000 in global stocks 50 years ago, how much money would you have now? Come up with an estimate, then check out the answer at the bottom of this article. Now, let that number sink in for a minute. The sheer scale of this growth in wealth over five decades is difficult to comprehend, but it is not the result of astute stock picking, successfully timing the ups and downs of the market, or some other form of financial wizardry; it represents an annualized return of 11%, which is the return you would have earned if you had bought a global stock portfolio, automatically rein-vested the dividends, and never touched it for 50 years.
It is a simple mathematical fact that the power of compound interest is enormous, and its benefits are available to anyone who would like to participate. Yet, tragically, few investors experience returns of this magnitude over time. You can make the correct initial investments and have a high degree of confidence in the long-term reward, but making even one false step along the way can ruin the math.
THE ONE BIG MISTAKE
If you had invested $10,000 in global stocks 50 years ago, how much money would you have now? Come up with an estimate, then check out the answer at the bottom of this article. Now, let that number sink in for a minute. The sheer scale of this growth in wealth over five decades is difficult to comprehend, but it is not the result of astute stock picking, successfully timing the ups and downs of the market, or some other form of financial wizardry; it represents an annualized return of 11%, which is the return you would have earned if you had bought a global stock portfolio, automatically rein-vested the dividends, and never touched it for 50 years.
It is a simple mathematical fact that the power of compound interest is enormous, and its benefits are available to anyone who would like to participate. Yet, tragically, few investors experience returns of this magnitude over time. You can make the correct initial investments and have a high degree of confidence in the long-term reward, but making even one false step along the way can ruin the math.
IT’S DIFFERENT THIS TIME
Armed with this knowledge, the correct course of action is clear: Leave your investments alone. Yet avoiding that one big mistake remains difficult because you have to deal with each market crisis as it occurs, and each crisis brings a renewed feeling that it is somehow different this time and the world is coming to an end.
Over the past 50 years, the stock market has been plagued by a wide variety of calamities, including the Arab oil embargo in the 1970s, skyrocketing inflation in the 1980s, the dot-com crash in the early 2000s, 9/11, the 2008 global financial crisis and, most recently, the COVID-19 pandemic. But the proper response to any crisis is the same: Stay calm and, when it comes to investing, leave your money alone. Investors who made the mistake of exiting the markets in response to these events likely missed out on the dramatic unannounced rebounds that followed. In the 12 months following the end of the dot-com bust, global stocks were up by 45%. After the global financial crisis, the 12-month return was 53%, and after the pandemic, it was 55%. Missing out on any of these returns would have been an enormous mistake. Investors who endured these crises rather than reacting to them were able to capitalize on the full benefits of compounding over time.
Woody Allen once claimed that 80% of success is showing up. As it relates to investing, his claim is an understatement. If you merely show up – and make a commitment to staying in the market – the forces of capitalism and compounding can make you wealthy without requiring you to take any further action. Just be sure to avoid the one big mistake.
Answer: $1,856,200. Source: MSCI