Sunday, 13 September 2009

The Power of Compounding

No force exerts more influence on your portfolio than time. Time takes a bigger toll on your terminal wealth than do taxes, inflation and poor stock-picking combined. Time magnifies the effects of these critical issues.

A poorly chosen stock may cost you only $2,000 in losses today, but over time that one suspect decision could cost $50,000 in lost opportunities.

Trading frequently for short-term gains may net you strong gains periodically, but the overall result, validated by time, is to create an enormous tax burden that could have been avoided.

Likewise, persistent inflation exacts a weighty toll on your portfolio becasue it destroys value at increasing rates.

Means and end should not be confused. Buffett once wrote to his partners, "The end is to come away with the largest after-tax rate of compound."

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