Compounding, investing, speculating: What are you doing?
Compounding Interest is the single most powerful force in investment planning. Be aware that there are important differences between compounding interest, investing, and speculating. If it can go down, it doesn’t compound! Banks and other financial institutions understand how to use compounding interest to their advantage. You need to as well, and we can show you how. The key ingredient is time, so the sooner you start, the more able you are to take full advantage of compounding interest. This allows you to earn interest on both the principal you invest and the interest you earn – potentially enabling you to turn a small sum into a substantial one over time. Without this, all other investments become far less efficient.
Balancing the money you save between assets that offer compounding interest, and investments that will fluctuate, but offer growth potential over time is key to your success.
Investing is “the activity of forecasting the prospective yield on the asset over its whole life…assuming that the existing state of affairs will continue indefinitely.” * Over time, directing all or too much of one’s money to one or the other, savings or investments, will lead to inadequate growth, or volatility that erodes the value of the portfolio when income is needed. The key ingredients to making both savings and investments work efficiently are balance, time, and patience. Study after study shows that frequent buying and selling is the primary reason individual investors earn far less than the market does over time.
Speculating is “the activity of forecasting the psychology of the market…attaching hopes to a favorable change in the conventional basis of valuation.” * This has a place, but should be limited to an amount one is prepared to lose entirely.
Cost counts! We’d be remiss if we didn’t mention this important point. Investment related fees and expenses are one of the eroding factors that can undermine an investment strategy. Our research and experience have clearly shown that individuals are best served by using indexed mutual funds as the primary vehicle to access the securities markets. Managed money is a losing proposition, for investors. If any manager could really beat their benchmark index consistently, we’d all give that manager our money. If anyone could beat the market, there would be no market. We do not charge asset based fees for investment advice and implementation. Most other advisers do.
*John Maynard Keynes