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People don’t need extraordinary insights or intelligence. They need the character to adopt simple rules and stick to them. — Benjamin Graham on what it takes to be a successful investor
Humans have a hard time understanding exponential growth. Here is a thought experiment. Let’s say you can save $100 every day starting on Jan 1st, 2023. If you do it for the entire year, you would have saved $36.5K by the end of the year.
But, in our experiment, you make a slight tweak and increase the savings that you are adding to the pot by 1% every day. So on Jan 2nd, you will add $1 to the $100 making it a total of $101 and on Jan 3rd add $1.01 (1% of $101) on top of it making it $102.1, and so on.
With a small tweak of a 1% increase in savings every day, you would have saved an incredible $367K by the end of the year. This is more than 10x the initial value of 36K we would have saved by just putting the same amount. The same exercise if you reduce 1% every day ends up with a total savings of only $9.7K.
The same is applicable to investing. During the initial years of your investing journey, the 10% return you make on your portfolio feels inconsequential - Just like the $1 we added in our thought experiment.
Let’s take a hypothetical investor Alan who starts investing in his 20s. Alan saves 25% of his income (assumed at $80K) at a 10% return. For ease of analysis, let’s assume that Alan’s salary stays fixed at $80K and he invests $20K every year.
During the initial decade, his investment gains are minuscule and he is still making more at his job than from his investments. But, something magical happens from the 15th year. His cumulative investments start generating more returns than what he is saving every year. In year 20, he is still adding only $20K to his portfolio (25% of 80K), but his portfolio now generates an additional $130K - 6.5x his savings amount & 1.5x his salary. By year 30, his portfolio is adding ~300K every year (~4x his salary). This is the magic of compounding growth.
The reason we started this series is that investing regularly and sticking to your plan is one of the best possible approaches to building wealth and we wanted to make your life easier and be your accountability partner.
Here is a reminder to you in case you forgot to invest this month.
Tell us about the investments you made so that all of us are exposed to new ideas.
Market Sentiment Recap: Jun ’23
While you are here, in case you missed out on any of our previous issues this month, they are:
AI Gold Rush: AI has sparked the biggest tech rally since the dot-com bubble of '99. From the Dutch Tulip Mania to the Global Financial Crisis, if we know one thing about bubbles, it’s how they all invariably end: With a handful of winners and a lot of ruin.
All In: One of the most common questions we receive is – Why shouldn’t we just put all our investments into an index fund and then call it a day? Here are 5 pitfalls that come with a 100% stock portfolio!
Momentum: For those who believe in efficient markets: The Momentum strategy has outperformed the market 98% of the time over a rolling 10-year period — from 1927 to 2009! And the trend has held in 40 different countries over 12 different asset classes.
Investor Interview with Gautam Baid: This month’s investor interview was with Gautam Baid, Founder and Managing Partner at Stellar Wealth Partners and the author of The Joys of Compounding.
This is easily the most evidence-backed, not click-bait, not "#1 Stock Now!" investing information I've found. I value supporting that. Thanks. Good work
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