YOU REAP WHAT YOU SOW
When you invest, you are allocating money in the expectation of some benefit in the future.
Your benefit from investment is called a return and your return may consist of capital gains or investment income, including dividends, interest, rental income etc., or a combination of these.
The power that drives the growth of your investment is something very simple but quite powerful, it is called compounding. Einstein is said to have called compounding the 8th wonder of the world.
Compounding is simply the ability of your asset/investment to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings – Investopedia
To illustrate the power of compounding, I will share some examples of investments with timeframes which quite easily fit within one person’s lifetime:
- $10,000 invested in the S&P 500 index in 1946 with dividends reinvested would be worth £51million today.
- The overall gain up to 2014 of a stock purchased in 1965 in Berkshire Hathaway is 1,826,163% , this means $100 invested will be worth $1.8m at the end of 2014.
- One share of stock purchased in 1986 in Microsoft, with all dividends reinvested has increased by 40,000%
In the examples given above, all the investor needed to do was to make a single simple decision which is to invest a specific amount at a specific time (with all dividends reinvested) while TIME does all the heavy lifting by working its magic of generating the compounding effect. However, what I find more intriguing is the fact that had the investor not stopped with a single initial investment but continued to steadily add to the investment pot on a monthly consistent basis, the end result would be even more phenomenal. Take a little moment to imagine the wealth the investor would have created for themselves and their household.
So essentially, the best results from investments are achieved when it is kept simple and the investor remains consistent and patient for the long term, in fact the most important quality required of an investor is not intellect, it is patience and a good temperament. Successful investment requires keeping things simple, being disciplined and patient.
Just as demonstrated in the aforementioned examples, a layman investor can achieve good results by simply investing in a low cost S&P 500 or FTSE 100 index fund on a consist monthly basis and over an extended period of time with all dividends reinvested.
So begin your investment journey today because the more time you remain invested, the more your investments compound therefore:
- Make a commitment and decide on the amount you wish to invest. You can start small, even with as little as £25. The first mistake will be not to start at all.
- Determine how regularly you wish to invest; I will suggest a monthly investment program.
- Stick to your commitment and invest consistently and diligently over an extended period of time and reinvest all your gains.
- As you continue to invest there will be times when you hear that the markets are in free fall, do not panic because that is your opportunity to invest when prices are cheap so if you have money available at such times, invest more aggressively in the low cost index.
I will leave you with some interesting quotes that I have found quite insightful and useful on my investment journey:
- “It’s better to hang out with people better than you in investing. Pick out associates whose investment behavior is better than yours and you’ll drift in that direction.“
- “Successful Investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant.“
- “If you aren’t willing to own a stock or invest in a business for ten years, don’t even think about owning it for ten minutes.”
- “I will tell you how to become rich, Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.“
- “I’ve seen more people fail because of liquor and leverage – leverage being borrowed money. You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing.“
- “It is not necessary to do extraordinary things to get extraordinary results.“ Just buy a low cost index consistently over an extended period of time, reinvest all your dividends and you will do just fine.
- “Nothing sedates rationality like large doses of effortless money.“
- “Time is money’ – the longer you stay invested, the higher your returns.”
Here is your call to action. Start investing NOW! However, if all these sounds daunting to you and you would love to speak to someone, get in touch with us either by commenting below or writing us a message directly and we will be happy to connect you with a knowledgeable individual who can walk you through those first steps, you’ll find it’s really not as daunting as it sounds.
Written by Remi Oseni
Connect with him on LinkedIn here
We welcome blog posts from our community. Get in touch here if you’d like to write a blog to be featured on this site and on our social media.