The Magic of Compounding
A series of small steps (everyday) pays off.
Let’s start with a question. Which would you rather have: $1,000,000 today or $0.01 that doubles every day for 30 days? Your goal is to pick the one with the highest ending value.
$1,000,000 sounds exciting. Think of all the awesome things you could buy! And, how could a penny ever amount to anything, anyways. It’s probably better to take the cash. Right?
Well, before I get to the answer, first a story about a tortoise and a hare.
One day, a confident hare challenges a tortoise to a race. The tortoise accepts the challenge, much to the surprise of the hare. On race day, they line up at the start, yell “go”, and the hare takes off, quickly disappearing out of sight. The tortoise plods slowly forward, one consistent step at a time. Soon the hare returns to taunt the slow-moving tortoise before running down a side path. Unperturbed, the tortoise continues to plod forward. Eventually the tortoise passes a napping hare, crosses the finish line, and wins the race.
Slow and steady wins the race.
The tortoise, by following a simple, boring path increases his progress with every step. The hare was all over the place, enjoying an exciting trip, but not making any real progress.
So, back to our question: $1,000,000 today or $0.01 that doubles for 30 days?
I hope you picked the doubling penny. After 30 days it would be worth $10,737,418.* Yes, that’s right.
Ten. Million. Dollars.**
The steady growth turns a penny into an amazing sum. This is the power of compounding.
Now, I talk a lot about the power of compounding. Compounding is like the story of the tortoise: small consistent actions may result in surprising outcomes. Those little actions grow on themselves to become very impressive.
When it comes to your money, you want compounding to work in your favor. It’s how you could turn a small amount of routine savings into large sums. It’s boring, it’s not terribly exciting, but after a while it may turn into an impressive pile of money. This is the secret sauce of investing.
Save. Invest in a diversified portfolio. Wait. Repeat. It does not get any simpler than this, yet it is not easy.
That’s where a good adviser comes in. We set you on the right path and help you execute. While it might not seem like progress at first, it is progress, and by being patient, the payoff may be massive.
No one thinks the tortoise can win, but it does. The patient application of a consistent, sensible process pays off. So, you don’t need the “Next Apple”; you don’t need to be the hare. A simple, well diversified portfolio of stocks and bonds will get you to the finish line. The real trick is staying the course for the long-term.
* This is for illustrative purposes only. It is basically impossible to earn 100% daily returns.
** Compounded growth is exponential. In case you don’t trust the math, here’s the equation on that doubling penny: Future Value = Present Value * (1 + R) ^T. $10,737,418 = 0.01*(1+100%) ^30.
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