This past week, I met with a young man who had managed to build a nice savings account.
He wanted something that had a little more potential for growth, so he took the initiative and asked for a meeting.
Time is the greatest resource we have. When I meet with younger people, we usually spend some time discussing this and how earnings can compound over time to great effect. Compound interest charts are fun and motivating.
Compound interest charts can also set people up to fail.
Seeing a chart that demonstrates the potential of compound interest can lead people to believe that growth is guaranteed and that it moves in a straight line. Neither of these is true.
Potential investors often scan a chart like this, and their eyes move quickly to the bottom of the page where they see the results of investing for decades.
Markets never move in a straight line.
The last 10 years have been some of the best years the market has ever seen. This has tricked some investors into perpetual optimism.
Some older and more experienced investors know better. The 10 years before this bull market was rough.
In March of 2000, we began a bear market called the Tech Bubble that saw the market fall over 40 percent. A few years later, the credit crisis began, and the stock market fell over 50 percent.
Even in good times, the markets have been known to have periods of fluctuation and loss. The final quarter of 2018 experienced a bear market. From the high point to low, the market fell over 20 percent.
Compound interest still works because markets tend to rebound, but you need to be ready for periods when you lose money and have the courage to keep trying.
Another way people make mistakes while waiting for compound interest to work its magic is getting impatient.
Compound interest takes time. It requires years of patience before you begin to see the growth that can be life-changing.
Imagine investing $1,000 in the S&P 500. After 10 years of getting a 7 percent rate of return, you now have about $2,000. You just doubled your money, but in the end, it still took you 10 years to make $1,000.
The beginning years of investing can be frustrating because things are slow. When people begin investing, they have hopes that they will see an immediate benefit even if they don’t admit it.
Too many people give up because the money grows slow or they get frustrated at periods where they lose. The real reward comes to those who manage not to get frustrated and keep going. This is what sets apart successful people in any field and everyone else.
A wise coach once said, “it is not who is good, it is who is left.” Those who just keep going reach heights that others only dream about.