Snowballs & investing – The importance of starting early!

Albert Einstein famously described compound interest as the 8th wonder of the world. A profound statement given that it was coming from one of the greatest minds of all-time. Put simply, compound interest is the earnings on an investments re-invested earnings, as we relate the principle to the world of investing. As the capital sum invested grows so to do the earnings on the capital until a snowball effect starts to take shape. As a snow ball rolls it accumulates more and more snow (investment returns) and more and more momentum (capital invested). The two keys to investing are to find wet snow and a really long hill if we are to grow a nice snow ball.   The good news is savvy financial planners can target the wet snow for you so your snow ball can compound and grow in a variety of market conditions and economic cycles. This helps ensure one of the vital ingredients is present in our snow ball analogy. The other key ingredient is the length of the hill which plays a hugely important role and can only be determined by the individual investor and their investment time frame.   To illustrate the importance of starting early we have taken a real world example of the US stock market which has grown at a rate 6.9% per annum over the very long term since 1926. This growth rate of 6.9% per annum is the real return achieved which means the eroding effects of inflation have been removed making the example more meaningful.   If we assume an initial investment of $1 grows at 6.9% per annum return and is allowed to compound each year, the importance of having a long hill becomes very apparent. The table below illustrates the amount by which an initial $1 will have grown by the end of each investors timeframe, depending on the age they start the snowball rolling. Let’s highlight 3 scenarios: Investor A – 25 year old with 40 year timeframe Investor B – 35 year old with 30 year timeframe Investor C – 45 year old with 20 year timeframe   The value of Investor C’s $1 investment will have grown to nearly $3.8 just by putting time and compounding on his or her side. The value of Investor B’s $1 investment would be worth $10.4 or nearly 3 times that of Investor C just by starting 10 years earlier. The magic of compounding and starting early becomes apparent when we look at Investor A’s initial $1 investment which will be worth $14.5 at the end of their timeframe. AJ Financial Planning is highly experienced in finding wet snow for your investments. If you feel the time is right to start the ball rolling, please don’t hesitate to contact the office and we will be happy to assist.   *Thank you to Warren Buffett for his analogy & quote “Life is like a snowball. The important thing is finding wet snow and a really long hill.” which provided the framework for this weeks article.