If you're counting on compound interest over time as a wealth strategy, and you're wrong, you don't get to try again.

February 6, 2019

 

If you've read Save Money, Build Wealth, or virtually any other personal finance book out there, it'll advise that you some percentage of your savings into a mutual fund or something similar (I personally recommend ETFs over mutual funds, but that's not even relevant anymore). The thought is that it'll appreciate over time. Good retail investments pay out about 5-7% on average per year, which isn't a lot when you're starting out ($500/yr on a $10,000 initial investment), but if you're patient enough, your $10,000 will eventually be $100,000.

 

The problem is though that it'll take 25 years to get to $100,000, and another 55 years to get to $1,000,000. And that's assuming you save $100 per month.

 

Why $1,000,000? Because if you want to "retire" on your investments, you'll need at least $1,000,000 to earn $50,000 a year (5%).

 

I don't know about you, but I don't want to wait 75 years to "retire".

 

And that "5% per year" return? That's not guaranteed. That 5% doesn't take into account fund managers that get paid whether their investments go up or down in value. That 5% does not take into account inflation (making a 5% per year return actually only worth about 2-3%). Remember, inflation also compounds over time.

 

That's not even the most important part of the lesson. Here's the point I want to get across to you today:

 

If You're Betting On Compound Interest Over Time And You're Wrong;

You Don't Get To Try Again

 

If your strategy is to work 50-60 years and put money into a mutual fund or an index ETF, and the markets don't return the 5% average that the guy at the bank said it would, you don't get to try again. You're out of time.

 

Maybe it's time to consider another strategy.

 

Does that mean mutual funds (*puke*), ETFs, stocks, bonds, and other retail investments are a bad idea? No. They're great. They work perfectly if you have already amassed your millions and you're looking for a place to park your money and live off the dividends.

 

They're only a bad idea (for you, not the guy at the bank or financial planning institution) if you're just starting out and you're counting on using them to amass your millions.

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