Those like me, ones that never had any guidance early on in life to utilize in developing a plan for it, have always had to react to the conditions in which we found ourselves. Over the decades I spent trying to figure this all out, I was never able to take advantage of compounding. For those not aware, compounding is a powerful investing concept that involves earning returns on both an original investment and on those returns received, by constantly reinvesting them back into the accounts in which they are held.
For maximum benefit, it is critical to start the process sooner (as I advise all Make More Monie mentees to do) rather than later (as I am now doing) as over the long term, compounding can multiply your initial investment exponentially. On this front, “doing as I say, not as I do/didn’t”, couldn’t be more apropos.
It is generally accepted that compounding originated in Babylon (ca. 2000–1600 BCE), with those then calling it “interest on interest”. Later, apparently, a Florentine merchant named Francesco Balducci Pegolotti provided a table of compound interest in a book he authored around 1340 CE. It is thought that Albert Einstein called it mankind’s greatest invention – along with referencing it as the eighth wonder of the world – and Benjamin Franklin described it glowingly, saying simply that, “money makes money, and the money that money makes, makes money”. The bottom line is that, figuratively speaking, the longer one consistently invests, the larger the hill for your financial snowball to roll down, and the bigger it’ll get.
I think we can agree that if those such as Einstein and Franklin were suitably impressed by and respected its ability to grow savings over an investment horizon (and likely equally impressed and respectful of its ability to grow debt), it is likely a power that we should be harnessing, to benefit our own bottom lines.
As I missed out on being able to invest over the course of my early compounding years, I make sure to take care of myself, health-and-fitness-wise, as best I can. I do this so that I am around for as many of ‘em as I can be, extending my own investment horizon. This is also the reason why I take advantage of any DRIP’s (dividend reinvestment plans) referenced in part one, wherever and whenever I can. These allow the dividends that my stocks earn to simply and automatically be reinvested into more shares of the stock, for maximum growth in the number of shares I own, on a dollar cost averaging basis.
Dollar cost averaging is a great way to time the market, by well, not timing it. Instead of waiting to get into the market when you think it is at a low, which is actually a fool’s game, dollar cost averaging sees one investing a budgeted-for or predetermined amount of money into the market or stock on a routine schedule, regardless of market conditions or cost of the stock on that day.
Over time, it will provide for a long-term strategy that will see a small amount of stock purchased when the market and/or a stock’s price is high and a larger amount of it secured when low, in effect, (non) timing it!.
As my own previously-mentioned investment horizon has been significantly reduced by my late start in investing – and my age – rather than strict dollar cost averaging with new money I have a different approach. I simply wait for the inevitable drops in the prices per share of those stocks in my portfolio, and then buy shares of each with the funds I happen to have on hand, during those opportunities..
As I have a relatively stable stock portfolio, but with issues spread over sectors that do not always rise or fall in value at the same time, there’s almost always opportunities to buy stocks on sale, regardless of the economic climate and just like getting a deal on groceries, it’s great to score a discount on a favored companies’ “product”. The added benefit of this is that when I can buy more shares of those stocks for a price lower than their intrinsic value, even lower than when I initially bought them, my upside for when the stock’s price bounces back has grown.
The professionals call this bolstering my “margin of safety”… I call it doin’ what I can to be safe, not sorry!
Disclaimer: The information contained herein should not be construed or considered professional advice. Nonetheless, thanks for reading! If it resonates, there’s “plenty more where that came from” on Facebook, Instagram, YouTube ‘n’ Twitter.