Source: Schroders, Time in the market not timing the market, David McManus, 2021
Tip 2: Understand the effect of compounding
Compounding may sound like a complex concept, but it is extremely simple. It helps you generate long-term wealth by building returns on returns on returns.
If something compounds – if a little growth serves as the fuel for future growth – a small starting base can lead to results so extraordinary they seem to defy logic. Let’s take the example of Warren Buffett: 95% of his net worth came after his 65th birthday. His skill may be investing, but his secret is time. That’s how compounding works.
Compounding involves investing your money into a well-diversified investment plan. Each time you deposit, a snowball effect takes place. Your plan size grows as the original investment plus the income earned from this investment plan increases. Of course, returns are never guaranteed. Markets can drop and you could lose more than your initial investment.
Let’s see how compounding could look for a well-diversified investment plan. Note how compounding is even more powerful when adding a regular monthly deposit to your portfolio.
*Return is for illustrative purposes only. This is never a guarantee on future results.
Having patience can help you achieve your goals
When investing long-term, it is important to set goals that are manageable and realistic. It also makes sense to give yourself time to meet those goals. Unless you win the lottery, it is unrealistic to expect financial milestones to be reached overnight. Be mindful, set reasonable goals, and have patience.
Global stock markets can always be threatened by rising inflation, political uprisings, natural disasters, or supply chain disruptions. And if you constantly react to market fluctuation, not only will you pay a price with trading fees, you will also play an emotional price with fear, doubt, uncertainty, or regret.
It can be overwhelming, but don’t panic. Instead, focus on what you can control: making rational investment decisions and following a consistent plan for the long term. Let time be your secret as well.
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