When everyone else around you is losing their head – stay focused on your plan. There is a seemingly endless barrage of worries to unsettle the markets, be it Brexit, China, Trump, the economy, inflation, Russia, etc. But isn’t it always thus? Every day it seems brings a new worry. And the pundits are quick to point out how you should position your portfolio for these turbulent times. But remember: how the market does today, tomorrow or next year is irrelevant. What matters is having the discipline and patience to stay invested. In investments, the money is made by investing in and owning good companies for a long period of time.
Companies with durable competitive advantages have business economics that will expand the underlying value of the business over time, and the more time passes, the more their value will expand. Thus, it makes sense to sit on an investment as long as possible, because the longer we own the company, the more it grows in value – which is the magic of compounding.
Let’s take a look at the effect of compounding in the stock market. The chart below shows SPY since inception, with dividends included, versus the S&P index price only. The difference in returns over the last 24 years is an astounding 285%.
The cumulative dividend payout over this time is 45%, so this alone is not responsible for the gap. The remaining 240% is the magic of compounding; dividends on top of dividends and returns on top of returns.
The most powerful force in the universe, as Einstein referred to it, is something that eludes many of us for two main reasons. One – most people don’t understand how it works. For instance, 10% growth for 25 years is not 250%, it’s 985%. The second reason why many fail to take advantage of compounding is because it takes time, lots of time. Warren Buffett has been wealthy for a long time but 95% of his wealth was earned after his 60th birthday.
Stick to your plan and watch your wealth grow.
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