To get rich quick, start early
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If you want to get rich, don’t count on a sudden windfall from a brilliant stock or market play. The best and fastest way to boost your wealth reliably is gradually: taking advantage of the gains shares offer over a long period of time through the power of compounding. In short, it’s all about starting early. Legendary strategist Richard Russell, who has been writing and editing the Dow Theory Letters since 1958, highlights a study by the newsletter Market Logic that illustrates the magic of compounding.
Suppose investor A makes seven annual contributions of $2,000 to his investment portfolio and gets a yearly rate of return of 10% between the ages of 19 and 25, but then stops putting new money in, having invested a total of $14,000, says Russell. Investor B makes the same annual investments every year between the ages of 26 and 65, at the same theoretical rate of return, for a total of $80,000. Who will have more money at the age of 65? Investor A ends up with $930, 641 – eclipsing investor B’s total of $893,704, thanks to his seven more early years of compounding. Those seven early years were worth more than all of B’s 33 additional contributions.
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Admittedly, assuming a lower rate of return changes the picture, with investor B ending up with a bigger money pot. But the magic of compounding is still there. If the return is 9%, investor A will still have grown his initial investment 44-fold and investor B just eight-fold.
If the return is 6%, investor A’s final tally will be 46% below B’s, but will still have grown by a factor of 12, compared to a threefold gain for B. The catch with compounding, as Russell notes, is that you need discipline to persevere; “you can’t spend it and still save it”. It’s boring – until the money starts to pour in after a few years, then it becomes “downright fascinating”.
Shares magazine provides another reminder of the importance of starting as soon as possible. Projecting the UK stockmarket’s annual return of 10.43% of the last 30 years into the future, and adding the 2007 estimated dividend yield of 3.7% to give a yearly return of 14.3%, Shares says that an investment today of £19,500 – put into shares in ten large, reliable companies – should create a nest-egg of £1m in 30 years’ time.
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