What would be your answer if you’re asked this question: Do you want Eur 1 that doubles for 31 days each day, or do you prefer to receive Eur 1 million today?
The importance of the above question cannot be exaggerated. The effect of compound return is easily underestimated. In the first few years, it doesn’t really raise eyebrows. But as time goes by, the effect becomes very visible. It’s like a snowball rolling downhill. No wonder Albert Einstein once said that compound interest is the eighth wonder of the world.
The answer truly is mind-boggling. Eur 1 that doubles for 31 days becomes more than 1 billion. The first 20 days of the month, you will be behind the 1 million. Finally, on day 21 you break the 1 million mark. It starts slow, but it grows exponentially. That’s the power of compounding in action.
I hear you say “But this is unrealistic. Who makes 100% a day for 31 days?” True. So, let’s use a more realistic example. You invest Eur 1000 the day your child is born and continue this charitable act each birthday until the adult age of 18 has been reached. You invest it in stocks that compound at 10% per year until your child reaches the graceful age of 65 years. Altogether, you invest a total of Eur 19,000. How large will your child’s pension pot be? A staggering Eur 4 million! Alternatively, your child can start saving when he or she turns 19, putting aside Eur 1000 per year until retirement. Total invested Euros will be Eur 45,000. How much is there for retirement? Just Eur 800,000. For the avoidance of doubt, the assumed 10% return is based on a long-term historical average. Nobody knows what level of return the stock market will offer in the next few decades. It can be higher or lower.
There are two important conclusions. The first is that the rate of return on an investment doesn’t need to be outlandish for spectacular capital accumulation.
The second conclusion is the importance of starting early. This is by far the biggest secret to compounding. The longer you wait, the more you will have to save later in life. The amount you must save to invest every year grows exponentially.
SilverCross has a specialised team of dedicated, experienced investors that scour the globe in search for excellent smaller listed companies. Each of these is selected on their ability to generate an attractive long-term compound rate of return. The team stays on top of developments related to each company it has invested in. Because good companies can turn into bad companies and bad companies can go bust.
Let time work for you
If you decide to become an investor that embraces compounding, then consider investing in SilverCross Global Small-Cap Fund. It will liberate you from the urge to time the market. You will not be hounded by the perennial question if "now is a good time to invest." Instead, you become a part owner of a small group of excellent businesses that can compound in value over time.
Read more about the power of compounding in this SilverBullet Newsletter.