The power of compounding—in health and wealth
Compounding is one of the most powerful forces in the world. Just ask Albert Einstein, who’s said to have called it the “eighth wonder.” The seemingly small decisions we make every day gain power over time.
That’s why it’s important to take the long view and come up with a plan—in both wellness and investing—that creates momentum in the direction of our goals. Don’t squander the power of time when you can recruit it to work in your favour.
Most of us understand that little things add up. Nowhere is this more evident than in our exercise and nutrition habits. Trading just 10% of your calories from meat for calories derived mostly from plants can extend your lifespan.1 And don’t feel like a failure if you can’t reach 10,000 steps per day. Another study shows that 4,000 are enough to reduce the risk of dying from any cause.2 The bottom line? What we do today really matters in the future.
No one expects to get stronger by lifting weights just one day per month. But when it comes to investing, there are folks who think the occasional big win is their ticket to success. This is simply not true. Just as your muscles benefit from the incremental increase in strength that comes from consistent training, so too do your investments benefit from a long-term time horizon. Because when it comes to investing, compounding means more than little amounts just adding up. The potential exponential growth provided by compound returns proves that time is literally money.
Let’s say two people decide to make a one-time investment of $10,000 with an average annualized return of 9%. One is 30 years old, and the other is 40. When they reach age 75, the investor who started at 30 will have $483,000, while the one who started at 40 will have $204,000. Those extra 10 years invested in the market turn out to be worth more than $200,000, even though the initial investment was the same. And keep in mind that the extra return only comes if you stick to your plan and stay invested in the market.
This material is issued by DFA Australia Limited (incorporated in Australia, AFS License No. 238093, ABN 46 065 937 671). This material is provided for information only.
