Albert Einstein is quoted, perhaps apocryphally, as the source of the quote:
Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn't... pays it."
And he knew a thing or two about other wonders of the world!
Most of us on Seeking Alpha have some understanding of this idea, but it's possible to probe its mysteries further and come out wiser than before. And that is made possible by an article from new contributor Adam Hoffman, CFA on the power of putting away $10 a day.
Hoffman includes lots of nifty charts showing how much investors can accumulate from seemingly modest savings. My favorite though was one chart that contrasts the performance of someone who correctly market-times among 14 Vanguard equity and sector funds over the past 16 years and someone who just puts in $10,000 into a Vanguard balanced fund but adds to it via savings each year.
Now it is clear that somebody who knew that in such and such a year, energy would be the big winner, in the following year healthcare, in the next U.S. small caps, etc., would surpass the performance of the greatest of the greatest professional investors. Over the past 16 years, returns would reach 10,884%. Nobody, of course, can do this, and only a fool would try. But Hoffman looks at what the ordinary investor would need to add to his balanced fund of 60% stocks and 40% bonds to match this result. And it turns out that the number is a relatively achievable $41,798 a year.
The lesson here is clear. Instead of listening to stock tips from market soothsayers and making risky moves as a result, your chances of success are actually within your own hands - if you but hunker down to the hard work of deferring some gratification in the present for the sake of your future solvency.
Read the whole article and click here to follow Adam Hoffman. We look forward to your thoughts in our comments section. And here are more advisor-related links:
- Jack Waymire: 5 tips for creating trust on advisor websites.
- Ronald Surz revisits his newfound leading indicator of market direction.
- Eric @ Servo: Lessons from the most important election of your lifetime.
- David Merkel, CFA on the perils of reaching for yield.
- JP Research: The real currency manipulator? It's not who you think.
- John Cochrane: Let's not botch Dodd-Frank reform.
- For more content geared to FAs, visit the Financial Advisor Center, sponsored by Franklin LibertyShares ETFs.