A miracle usually involves something that cannot be explained by science, or maybe even the supernatural. Compound interest might not fit that definition of a miracle, but it’s pretty darn close.
How else to explain that $ 1 invested in the Dow Jones Industrial Average at its inception becomes around $ 150,000 by 2021? Yes, it’s been over 125 years, but it’s still a lot of growth – about 10% per year on an annualized basis. The answer is not divine intervention. It’s just math.
Many people have heard the story of the grain of rice and the checkerboard. In exchange for 64 days of work, or a similar bargain, a peasant asked a king for a single grain of rice on the first day and his wages doubled every day. On day 64, the king owed the peasant about 300 million tonnes of rice. It’s exponential math, and it’s behind the power of composition.
Investors cannot double their money every day. (Learning to refuse deals that promise this kind of return is another investment lesson.) Money grows slower than the rice paid for in the fable.
Here’s how the mix works: The initial $ 1 doesn’t have much to do with winning 150,000 times. Most of the gain comes from all the reinvested interest, which allows the money earned to earn money. It’s amazing, and the safest get-rich-quick scheme is to invest in the market and wait – well, for years.
So maybe it’s not that fast. But the power of the makeup shows why it’s so important to stay invested in the market for a long time, through thick and thin. Successful investors don’t try to time the market. They are trying to maximize the time in the market.
We’ll talk more about how to make money grow in this video. But first, answer this:
What interest rate do you need to earn to double your money in five years?
For the answer and much more: watch.