Even though people bang on about the importance of compounding returns all the time, it's hard to truly appreciate their power until you start to see the impact on your own money.
Our psychology just isn't programmed to care about things 10 years into the future. This of course makes it hard to visualise the idea that $10,000 invested today into a company growing steadily at 6% each year, plus a 4% dividend, will be worth over 2.5 times that amount in 10 years.
But once you embrace this power, you'll probably wish you had started earlier.
I'm keen to give my own son the full advantage of time and start him off with a basket of companies with strong competitive positions which will grow for years (maybe decades) to come. Here are three companies, I'll be adding to his portfolio:
1. XERO FPO NZX (ASX: XRO)
Even if cloud accounting company Xero does not look like a conventional bargain today, I like the idea of adding the company to a dedicated long-term portfolio.
In a lot of ways Xero still breaks a lot of rules of conventional investing. But the company continues to deliver incredible growth with its top-notch, user-centric product, strong margins and enviable ability to raise prices. I think these factors will continue to drive long-term success.
2. CSL Limited (ASX: CSL)
CSL Limited will be the second addition to the portfolio. The company is far more mature than Xero, but CSL's indispensable products, investment in research and strong returns on equity give me firm belief the company can weather the economic storms to come. Although not cheap, I think CSL's current price of 26x trailing earnings is fair for a quality company which continues to add long-term value.
3. SKYCITY Entertainment Group Limited-Ord (ASX: SKC)
On the other end of the spectrum to Xero will be the addition of SKYCITY Entertainment Group, a company much like a regulated utility with strong, regular cash flows and an appealing dividend.
The casino and entertainment company will provide a moderate income from its 3.6% dividend and act as a valuable discussion point down the track about the difference between gambling and investing!
