The Magic of Compound Interest happens At The End
Chapter 35 of The Rational Investor
Welcome to another installment of project “passive wealth,” where I will be releasing my next book on investing (working title: “The Rational Investor”) chapter by chapter to paid subscribers of Making of a Millionaire.
Chapter 35: The Magic of Compound Interest Happens At The End
Throughout section 3 of this book, I have presented you with dozens of academic papers that lead to the simple conclusion that you should not sell your portfolio in response to the scary investment narrative of the day.
In this chapter, I want to illustrate the reward investors can expect if they have the discipline to start investing early and never sell until retirement.
Here are a few assumptions in a hypothetical situation.
You have a 40-year investment horizon.
Every month you invest $500.
Your average annual return on investment is 8%.
If you never deviate from that plan after 40 years, you would have $1,745,503.
That’s an eye-catching number. But any buy-and-hold investment strategy looks amazing when you zoom out 40 years. But early on, it’s a lot of hard work, and it takes years before you start to see a major payoff.
Consider the following chart, which plots your total contributions, return on investment, and portfolio balance over those 40 years.
The first thing I want you to understand is that it isn’t until year 16 that your lifetime return on investment (the dotted line) exceeds your lifetime contributions (the dashed line). That is more than a decade and a half of you doing all the heavy lifting.
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