Small changes, big impact

Written by John Osbon on February 13, 2013

Does one percent matter?  If you’re watching the balance in your portfolio for one year, the difference between an eight percent return and a seven percent return can be a fair amount of money, but won’t really change your life. But maintain that difference for a generation and the impact will really get your attention.

Let’s let the numbers speak for themselves.  Start with $1 million and earn five percent a year for 25 years. You’ll end up with a tidy sum of $3.5 million. Bump the return up just one notch to six percent for the same period and the total is a far tidier $4.5 million.

The difference between seven and eight percent returns? It’s even more dramatic: $5.7 versus $7.4 million.

Earn an annualized nine percent for 25 years and you’ll have $9.5 million after a generation.

Screen Shot 2013-02-13 at 8.43.51 AM

 

It’s magic

Whoever invented compounding should win the Nobel Prize, a Super Bowl ring and an Oscar every year. Sure it’s just simple math, but its impact is pure magic for long-term investors.

By controlling expenses, limiting tax exposure, and maintaining the desired asset allocation over the long term, investors can significantly elevate their cumulative wealth.

Of course, there’s a downside too. Subtracting a seemingly puny percent of return each year can cost hundreds of thousands of dollars over long timeframes. NASA scientists faced a similar situation before landing men on the Moon – off 1 inch on Earth, off 1000 miles on the Moon.

Like a trip to the moon, generational investing is a long journey, so staying on course is essential. Next time we’ll take a closer look at the importance of maintaining your target asset allocation.


  • 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.