Due to Covid-19, we’ve been able to catch up on our reading. One of the books we’re both reading, The Psychology of Money, has a fascinating chapter on the power of compounding. The most surprising statistic was that Warren Buffett, the famous investor and CEO of Berkshire Hathaway, made 96% of his wealth after his 65th birthday. The wealth did not compile due to one great stock pick he made on his 65th birthday, rather his investments continued to have compound growth year after year. The power of compounding can be exponential and that can be hard to wrap our minds around. Charlie Munger, Buffett’s long-time business partner, once said “The first rule of compounding is to never interrupt it unnecessarily.” Buffett is a great investor that we should not even try to replicate, but we would all be wise to try to let our investments compound without unnecessary interruptions.
Fortunately, we don’t need to be Buffett-like to benefit from compounding - we also don’t have to time markets or pick the best stocks to own - we can let the power of the markets work for us by owning a diversified portfolio and focusing on consistently, decade after decade, allowing the compounding to work. To not interrupt the compounding, you should stay disciplined to your investment strategy and asset allocation unless something in your life changes that would require those things to change as well. While there are no guarantees when investing, this approach is often the most prudent.
Covid-19 has given us a good glimpse at what this looks like. In the first quarter of the year the S&P 500 index was down 19.6%. It can be difficult to take that sort of a loss while sticking to your strategy. For those who remained disciplined, they likely would have benefitted from the S&P 500 returns of 20.5% return in Q2 and 8.9% return in Q3.1We know that for many, the upcoming election is another event in which it will be difficult to stick to your strategy. If that’s you, please check out our recent blog post Investing and Elections.
1S&P 500 Index, source: LPL Research Daily Performance Report 10-1-2020
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.