If you start with one penny (cent) and you double your money everyday, how soon will you become a millionaire? One year? Six months? Or just 2-3 months? Nope! You may not believe but it will just take 28 days for you to get to the million dollars level.
How can this happen? This amazing phenomenon is what Einstein called "The World Eighth Wonder" -- Compounding. Of course, daily double is not something one can realistically make. It is just to show the magic power of compounding. Realistically speaking, if your money can increase at 15% per year, it will double in 5 years with compounding. At 10%, it will double in less than 8 years with compounding. This is not something unthinkable. The power of compounding is more pronounced as the time passes in accumulation, the longer the better. In other words, it is better to start investing with compounding as early as possible. While it is never too late to start to do so for our own retirement planning, it is more important to help your kids to start at their young ages.
What is the best way to compound your money? You can try with bank saving with an interest of near zero to about 1% at the most. Or you find some magic way to increase your capital dramatically, say consistently over 20% annually. I'm not sure the latter is realistic for general investors. Here is my formula for a relatively painless and low risk way of effectively compounding your money over a long time:
- Keep a substantial amount of cash in your hands, with which you will be able to take good opportunities down the road if they arise. This is especially important in the current very uncertain period of time! Rest assured that such kind of opportunities will always pop up without prior notice. In my earlier years of investment, I ran into several times when I wish I could have enough cash to put to work but I regret I didn't. I learned the lesson now and I'm raising cash at the moment.
- Set up your core portfolio with solid and well managed companies with a track record of paying increasing dividends for decades. I have discussed many of them in the past and will do so as well if I find more good ones. In the past 2 months or so, the overall market was really doing badly, which also brought down the share prices of good companies. As long as it is not due to the fundamental problems with such good companies, you should feel great to see the dropping of their share prices. You should take the opportunities to add more shares of such companies to accumulate, not to run away from them. This is one of the keys to succeed in creating your wealth over the long term. Companies such as Microsoft, Intel and Cisco are really great in their valuations at the current prices. I noticed Microsoft shot up today for about 4%. I would not pretend to know in advance of such a price move for Microsoft, but I'm not surprised to see this for any of them given how deeply they have been undervalued. Some day people will understand their values and start to be crazy about them. So you are sort of paid for waiting with their good dividends.
- Lastly but not least, be sure to enroll into their DRIPs, i.e. to reinvest their dividends, which is a sure way to effectively compound your money. I'm sure you will be very happy if you look back after 5 years how greatly you have done.
- Not for everyone but if you are savvy enough with options, you may try covered calls to significantly increase your income with your existing shares. With this strategy, it is really not difficult to reach a goal to have your return at a double digit rate. It appears daunting but really it is not that difficult to play with options.
I have been reading your articles with interest, and then came across this one, altho some info are outdated, the core is relevent, hence, had to borrow for my own blog dollarsflip.blogspot.com/2022/04/penny.html
ReplyDeleteif you scroll at the bottom of the article, you will see that I state not being the author of the original version. Keep up the good Work Mr. Bull.