Two key virtues to become successful investor are patience and time. This is clearly dealt with in this recently released book, The Psychology of Money, author’s Morgan Housel shared the story of Ronald Read. Ronald Reed was born in a small town in the United States. He has been working as a janitor and auto mechanic for 42 years. When he died in 2014 at the age of 92, he made an international headline as a janitor and sneaked a fortune of $8 million.
Secret- There is no lottery ticket. There is no gambling. Invested in Ronald Reed blues and waited for decades. That’s it. There are not so many people like Ronald Reed, but the one who has done two things and amassed a fortune is still there. One is time spent on investment, and the other is patience. Just 2 things that had nothing to do with how smart or educated you were.
However, how can two simple things that have nothing to do with your investment style and choice of fund be the driving force behind your investment success? By the way, in this blog we are going to decipher it for you. The Power of Time in Investments.
Time is one of the most powerful elements in investing with Albert Einstein’s magic, which was once called the 8th Wonder of the World.
Most of us at least know if we understand compound interest thanks to the compound interest calculations we studied at school. Investments are compounded when the return the investment is generating starts to provide a return. This is sometimes referred to as “interest on interest”. I think it’s a ball of ice falling from this mountain. It starts small, as it rolls, it continues to increase in mass and is huge.
But if you need to see the power of compound interest, you have to invest your time. This applies to all types of investments, including investment trusts. Mutual funds, especially stock mutual funds, give time and the long-term benefits of compounding calculations show that their advantages are well known. But let’s understand with an example to help you understand. Despite all the ups and downs of stock investments, you get an average annual return of 12%. This is what your investment journey looks like.
Absolute returns in the first few years are small. However, continuing the SIP for many years, the absolute revenue is gradually increasing every year. If you look at the graph, you can see that in the first few years, the number of absolute returns is extremely small and the total investment is increasing mainly due to the cumulative increase in investment. But after 5 years, something strange happens. Growing slowly, the profit line suddenly started to speed up, and by the end of the tenth year, it was almost equal to the investment of the day.
This magic is compound interest. Investopedia defines compound interest as interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit. Simply, this means earning interest on interest. For instance, If you invest NGN100,000 to earn 10% in 1 year, you’ll have NGN110,000 in total. That is, NGN100,000 + NGN10,000 (interest). With compound interest, in the second year, you’ll earn 10% on NGN110,000 and not just the NGN100,000. You get the picture, right? Great. Let’s dig deeper. But after 10 years, the return is about the same as the amount invested in a mutual fund.
Therefore, the conclusion is that the longer the investment, the greater the impact of benefits and the more profits you can make each year.
Maintaining an investment with patience can seem like a boring strategy, but in the long run it has earned attractive returns. Even some of the most successful investors, including Warren Buffett, are emphasizing the importance of patience to make their investments a success. To borrow Buffett’s words, it’s a device for transferring money from a stock market rush person to a patient.
And there is enough evidence to show the importance of patience to becoming a successful investor. The history of the stock market is full of examples of when the market fell sharply. The reasons for this fall can range from pandemic to bubble burst. But after every clash there is a recovery, often a rally.
In March 2020, many investors rushed to recover their investments when the market plunged almost 40% viscously in January of that year. But those who maintained their investment with patience quickly made a profit. By February 2021, the market rebounded by more than 100% and reached a record high. Like, there was a sharp adjustment in 2000-2001 and 2008. 2009, 2013, 2015-2016 and 2020. But soon SENSEX witnessed a backlash, none of which lasted long. As can be seen from the vote, no matter how steep the decline, the market recovered within a few years. In fact, the market has delivered incredible benefits within three years of the crash. This happens because the market is cyclical in nature. And no bad cycle is forever. So, avoid the mistake of repaying your investments during these modifications and keep investing patiently to ensure that your expected losses are not converted into actual losses.
Wrapping It Up.
Maintaining the state of the investment in connection with the investment is the most cautious and wise approach for long-term investors. There is always news of stock market volatility, but it’s about ignoring the key news to becoming a successful investor and focusing on your goals.
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