Forget checking the stock markets, reading the Financial Times and Bitcoin for just one minute, if you want to know what really makes a successful investor then you need to understand compound interest.
You see investing is not about acting on information and buying and selling shares according to your view of that information. As I have said many times this is trading which is very different.
A successful investor will pick an investment strategy that is aligned to their goals and objectives and will leave it to do its thing regardless of what is reported in the financial press. Behind the scenes the magic of compound interest will be making sure that the investment income earns income and that income earns income and so on.
What is compound interest?
Quite simply, compound interest is the interest or dividends you receive on your investment reinvested back into your investment so that this also receives future interest and dividends. In other words interest on interest.
Whilst this may start off small, it can grow to massive proportions over time. Let me give you a few examples.
Let’s say you are not much of a runner. If I asked you whether you could run you may say not a chance. But if I really pushed you and said could you run if there was a big grizzly bear coming towards you? You would probably say yes.
So you may be able to run 10 metres. If you started running 10 metres on day 1 you could then run 11 metres on day 2. By day 10 you may have run your first mile. By the end of month 1 you may have run 3 miles and by the end of 6 months you may even be ready to run your first marathon. You are compounding your training up and up.
In monetary terms let’s take 1p, if it was to double every day (earned 100% interest every day) by day 2 it would be 2p. By the end of the first week it would be worth 64p. Not much I hear you say. But by the end of day 20 it is now worth £5,242 and by day 30 it is worth a massive £5.3m!!
If you don’t believe me check out the maths here.
How does compound interest help me?
Ultimately if you get your investment strategy right at the start it will help relieve you of any stress and anxiety you feel about stock markets and seeing your money fall.
Compound interest will keep doing its thing. Over the longer term over half of your investment return will actually be from interest and dividends reinvested.
It may not be exciting but it works.
If you would like help designing an investment strategy that will ensure you are able to live the life you desire and one day become financially free please give us a call and download our Simply Investing Guide below.