Lesson 4: The Importance of Long Term Investing
In last Thursday’s newsletter, we discussed the importance of compounding and why it is essential to invest in compounding assets if you want to create wealth.
Today, we discuss another essential principle often overlooked, especially because of our need for instant gratification: Invest for the long term.
Sticking with our example from last Thursday where we wanted to grow our savings from $20,000 to $100,000. We concluded that if we can invest $20,000 in an investment that earns us 10% compound interest annually, then it will take approximately 17 years to reach our goal of $100,000 (5x our initial investment)
But what happens if we leave that money to continue growing?
If we leave our money to do its work, then our 2nd $100,000 is earned in just over 7 years, the 3rd $100,000 will take less 5, and so on. That is the nature of geometric returns or compounding.
Who said maths isn’t beautiful!
Now you know how Warren Buffet accumulated his fortune, compounding his wealth at over 20% per year for 56 years!
Principles of Creating Wealth
So, over the first four “Introduction to Investing Series”, we have established a few simple rules to help grow our wealth:
Spend less than you earn
Invest the rest
Invest in compounding assets only
Invest for the long-term
Next we will discuss why at Lockstep we choose to invest in the Stock Market.
We obviously want to invest at the highest rate of return possible, but we need to be realistic. If Buffett invests at over 20% per year, it is unrealistic for us to expect to grow our wealth at 50%. The S&P 500, on the other hand, has returned, on average, just over 12% per year for the previous 50 years.
Whatever you invest in, ensure the return is higher than inflation, or you are losing money.