#1 The compounding doesn’t start until you start.
Most people don’t fully understand how powerful the effects of compounding can be. If they did, many would choose to start investing right away.
But understanding the true power of compounding is not intuitive. The math must be seen to be believed.
When investment returns are positive, the benefit of having more and more money available to invest compounds over time. That’s because the returns earned by your original investment have an opportunity to earn returns of their own. The result is that small amounts invested today can turn into surprisingly large amounts the longer they remain invested.
Once you understand how the numbers work, it’s pretty clear why Warren Buffett believes, “My life has been a product of compound interest.”
But seeing is believing.
Make your own estimates in the calculator below and see this surprising power for yourself.
(Hint: Whatever estimates you choose, the answer will always be the same—the sooner you get started, the better!)
The Power of Compounding
It's kind of like telling your money to get a job!
Potential value after 30 years.
|This is the current market value of your portfolio.|
|Try $5, $10, $20 or more.|
|Your daily investment||$|
|This is a hypothetical rate of return. Please make sure you read the important information below to learn more.|
|Usually the longer you compound, the higher your potential return.|
Play with the calculator
(make your own estimates)
#2 Invest5 is automatic. Discipline is the key to long term investment success.
Investors are often emotional. That’s another way of saying—they are human. When the stock market or other investments don’t perform well over the short term, investors often react negatively. They sell their current investments, stop making additional investments or decide not to invest in the first place.
That’s usually a mistake. Markets have tended to rise over the long term. As we’ve already discussed, the S&P 500 index, a diversified portfolio of the largest and best companies traded in the U.S., has averaged a return of more than 10% per year over the last 50 years.
While there is never a guarantee, if markets continue to rise over time, then starting or continuing to invest when markets fall is usually the right move. Yet, for most investors, it’s hard to do.
But if you are a buyer of stocks over the long term, according to Buffett, “who wouldn’t rather buy at a lower price than a higher price? People are really strange on that. They should want the stock market to go down—they should want to buy at a lower price.”
Still, we’re all human and there’s only one Warren Buffett. When markets fall, it’s really hard to continue buying and investing, even if we know we really should.
What to do?
Believe it or not, studying (of all things) organ donor programs from around the world may help provide an answer. In countries where people automatically participate, unless they explicitly “opt out”, more than 90% of people register to donate. In countries like the U.S., where you must “opt in” to participate, fewer than 15% of people register to do so. Why?
It’s not a difference in culture, it’s just that people tend to stay with the prevailing status quo. If it’s normal and usual to do something, that’s what most people do.
And that’s why making an automatic investing program your—normal and usual—is so important. If your status quo is to invest in a disciplined fashion, you’re much more likely to continue doing so whether markets go up or down—allowing you to benefit from the power of long-term compounding.
In other words, once you’ve signed up for an automatic investment program, it’s just easier to stick with it. And studies say, not just a little easier——a lot easier!
That explains why your first decision—signing up for a disciplined, pre-planned investment program like Invest5—is actually the most important investment decision of all.
#3 With Invest5, there’s no need to predict the market or a “good time” to get started
Is the market too expensive?
Is now a good time to invest?
What if something “bad” happens after I begin?
These are the questions that often prevent investors from even getting started.
But with Invest5, investors don’t have to predict the largely unpredictable: Which way will the market go next? With an automatic program that invests your money over time, answering that question becomes largely unimportant. In fact, when stocks get cheaper, the program works automatically to take advantage—as the same amount invested can now buy even more shares.
Long term investors never have to guess the right time to start. As long as stocks move up over the long term, getting started now makes sense for almost everyone.
So, please join us at Invest5. We think you, your kids and even your grandkids will be happy you did!