Sounds improbable, doesn’t it? Sounds like you’d need to be Warren Buffett, get insider access to some secret investment vehicle or have an extraordinary amount of luck. No, no and no. All it took was an initial investment, discipline and patience.
Here we go
We’re all familiar with the S&P 500, the most popular and most vanilla index of them all. Five hundred big US stocks spanning all industry sectors. Warren Buffett uses the S&P as his comparison benchmark for the annual Berkshire Hathaway results. We know Warren is wildly successful, and his track record versus the index is phenomenal. But how about the plain old S&P? Not too shabby, as he highlights in his 50th anniversary Berkshire Hathaway Annual Report. The index, including reinvestment of dividends, has compounded at 10 percent annually for the last half century.
That 10 percent rate turns $1M into $112M in fifty years. Here’s a year-by-year table from the Berkshire report comparing Warren’s rate of return against the S&P. Warren wins by a mile, with a annualized return around 20 percent. But think about this: the remarkable power of that 10 percent rate was available to any investor (or her heirs) willing to take the risk inherent in owning stocks.
Double, double and keep doubling.
We have a math shortcut in investing called the Rule of 72. By this rule, a security returning 10 percent annually doubles in value in about seven years. Leave it alone for fifty years and compounding delivers 112x. If you don’t have that much time, consider the 56x jackpot you’d have at 43 years, or even the 28x you’d see at 36 years. As Einstein said, “the most powerful force in the universe is compound interest.”
The future is not the past
Of course past performance is no indicator of future results. We can’t go back in time 1965 to get on the 10 percent train. But is there some readily available index investment that will return 10% annually over the next 50 years? Maybe. It might be the S&P 500. Or perhaps an international index. Or an industry index. We can’t know for sure until 2065. But owning a diversified mix of index ETF expands your potential to earn that kind of return.
And if 10 percent doesn’t happen
Face it, a 10 percent rate for 50 years is no sure thing. Let’s be more modest and compound at a lower rate. You pick it from the table below anywhere from 1 to 12 percent and see what happens to your $1M in fifty years. At 8 percent, 50 years of doing nothing returns 54x. By the way, we included 12 percent in the table because since 1988 some assets have compounded at similarly high rates, like Hong Kong (12 percent), Denmark (14) and Brazil (15). You couldn’t have easily bought them then but now these and many other assets classes have ETFs. (Data courtesy of Windham.)
Multigenerational thinking. Or not.
Continuous compounding — letting time and percent signs do all the work — is the core principle of multigenerational investing. A 112x bequest can completely change the lives of heirs. But not everyone has a next generation. Some who do aren’t interested in passing on assets. No worries. You can still invest as if your money will compound for 50 years and get the benefit for as long as you are alive. Talk with your advisor about diversification as a way to increase your chances of turning patience into a big number for you and/or future generations.
John Osbon – email@example.com
This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”
“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.
Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.
Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.
This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.
While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.
Adviser does not endorse the statements, services or performance of any third-party vendor.
Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.
Any IPO alerts are purely informational and should not be construed as recommendations to invest.
Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.
Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.