Being a successful stock picker is no cinch and achieving outperformance isn't easy, however, the beauty of compounding your money for many years is that you don't actually have to achieve a supercharged percentage return to get rich.
One 'easy' way to achieve your financial goals can be to outsource the investment decision making process to a high-quality listed investment company (LIC) such as Argo Investments Limited (ASX: ARG) or Australian Foundation Investment Co.Ltd. (ASX: AFI), or you could utilise the services of a highly-regarded fund managed by the likes of Platinum Asset Management Limited (ASX: PTM) or Magellan Financial Group Ltd (ASX: MFG).
Let compounding work for you.
The maths is quite straight forward. A $25,000 investment at a rate of return of 10% per annum (pa) will grow thanks to the beauty of compounding into $1,131,481 in 40 years.
So, for example, from a standing start at the age of 25 with $25,000 in savings and no further external investment, aided by a solid investment return of 10% compounded annually for 40 years, at the age of 65 you're a millionaire!
There are a few key takeaways from this example worth noting:
- Firstly, it takes time to build wealth. The earlier you start and the longer you allow your investments to compound, the wealthier you will become.
- Secondly, spending less than you earn is necessary so that you can save for your initial investment.
- Thirdly, compounding is a must. That means not taking any of your money out and reinvesting all your profits too.
- Fourthly, the average annual return achieved matters and makes a big difference. While 10% was used in this example, should your portfolio achieve a return just 2% higher (i.e. 14% pa), then your portfolio's value at age 65 skyrockets to $2,326,274 – that's a big reminder of what a difference stock picking can make!
