Wednesday 24 July 2019

Compound interest is the most powerful force in the universe.

Intelligent investment is rewarding over the long run.

Intelligent investor should recognise the force of the axiom:  compound interest is the most powerful force in the universe.


1.  The reinvestment of returns over a long period has dramatic consequences.

Over 10 years, $100 invested at 1% rate of compound interest over a decade, would become $110.  At compounding interest of 8% per year , $100 becomes $216 in a decade.

Over 40 years, the difference between a 1% return and one of 8% is the difference between $149 and $2,172,


2.  Reinvested dividends play a large role in long-term capital accumulation.

While many amateur investor tend to be attracted by capital gains and attach little weight to dividends, reinvested dividends play a large role in long-term capital accumulation.

If your target 8% return were made up of 3% dividends and 5% capital gain, your $100 would accumulate to $2,172 within reinvested dividends and $704 without them over 40 years..


Why do retail mutual fund investors do so badly?

Why do retail mutual fund investors do so badly?

1.  Charges are part of the explanation.

Mutual fund investors pay not only management fees but also the trading costs within the funds they hold.

They also pay further trading costs when they themselves buy and sell, which they do too often.


2.  But the principal explanation is bad timing.

Retail investors buy high, and sell low.  They are late into fashionable sectors, and late out of unfashionable ones. 

There is probably no worse investment strategy than following the conventional wisdom with a time lag, and that is precisely what many small investors do - often with the encouragement of their advisers.