16th April, 2021
Blog, IC Insights
The Eighth Wonder of the World…
Financial planning and investing are intrinsically linked, though we are often asked for investment tips without regard for any plan… “what can I buy to achieve high returns?” or something along those lines. The answer is usually not what’s expected, specifically because the person asking often does not want our typical response which usually includes us asking them lots of questions and the explanation of concepts like diversification, risk tolerance, and time horizons. What that person often wants is a much easier answer. For us it would be much easier to gravitate to an easy answer as well, where the solution might result in a quick gain for minimal effort, though when you think about that you notice that the gap between investing and gambling appears closer than it should be…
If I were to write an honest headline about producing successful results when investing, I would say “it’s like most things in life – have a plan, commit to it, and work hard for at least ten years to see the benefits”. The key ingredients here are time and consistency. Neither of these variables can apply over short timespans, where investments are more like punts. I would include a one-off stock purchase, bitcoin, and gambling in that category. To be clear, money can be made, sometimes at high returns, though its high stakes and not to be used as a reliable foundation if the end outcome is to be sustainable.
Investing successfully is a little bit like looking after your teeth, you can miss brushing for a couple of days and nothing much will happen, though if you do not brush them for 12 months you will be in a whole amount of trouble. Equally, brushing for two hours on one day might give you a short-term shine, though it is not going to have any long-lasting effect. Making a commitment to brush twice a day every day for two minutes is where the rewards are. They are invisible rewards as well; you do not even notice the benefit until you look back at 52 without any fillings. Compounding is very similar and equally powerful. Take two youngsters who start a savings race. One invests £2,000 each year for 30 years, achieving a consistent rate of return of 5% per annum. The other also invests £2,000 each year, but instead puts the money in his piggy bank. After 30 years the second investor has a savings value of £60,000, whereas the first investors’ portfolio now sits at £125,843; a differential of £65,843 and more than twice the value.
Einstein called compounding the eighth wonder of the world – it really does have such incredible power over time. It is a simple concept; the hard work is in achieving consistent returns over long periods. Some people do not have the time or the patience though and want to see a more immediate benefit in their value however short lived that benefit is likely to be. I guess this is where the term ‘rookie’ or ‘maverick’ may have emerged. Hard work, consistency and time are very powerful if you are trying to drive a successful wealth accumulation outcome, and one that has become the cornerstone of our business over the last 50 years.