Focus on What Matters and Ignore the Noise
Albert Einstein famously said, “compound interest is the eighth wonder of the world, those who understand this, earn it… those that don’t, pay it.” The simple truth of compounding returns is the most important thing that matters for the long-term investor. Yet in today’s world we are consistently bombarded with distractions, become pre-occupied with other things, and we forget this simple truth.
Companies try to sell us the latest products that promise to make our life better and more efficient. Smartphones are a constant barrage of notifications and seem to be more mischievous at taking our time, than smart. The bank wants to give us a new credit card, when we just told them we are trying to save. The electricity company tries to lure us to their service with $200 discount; they then say switch our internet too, and we get a free TV. Now the online streaming service is telling us their new show is out. All 30 episodes. Watch it tonight, now, now, now!
All these things create clutter in our lives which overwhelms us, makes us more emotional, less rational, and distracts us from what really matters. As an investor, you are subject to even more distractions. Markets are up. Markets are down. A recession is coming. It’s a bull market! Constant noise that can distract you from your long-term financial plan.
As a long-term investor your horizon may be 10, 20, or even 30 years. And if you consider that returns on company shares (using the US as an example) have been around 10% per annum for the past 150 years, compounding these returns leads to significant wealth creation. Even allowing for modestly lower results given today’s lower interest rates, compounding $10,000 at 7% (our long run expected return of a high growth portfolio) grows to $20,000 after 10 years, $39,000 after 20 years and $76,000 after 30 years. This is the simple truth of Einstein’s famous quote; the magic of compounded returns is what matters most for long-term investors.
Compound interest is the eighth wonder of the world, those who understand this, earn it… those that don’t, pay it. - Albert Einstein
Market Highlights – March
- Global share markets had another positive month and have had one of the fastest starts to the year since the 1990’s, rising over 10% since the start of January.
- More broadly, the global economy’s growth continues to moderate in pace, and this has led to falling long-term interest rates. Nevertheless, there have been some positive noises of a resolution between the United States & China on their trade disputes.
- However, it was the NZ share market that stole the show, rising 6% in March, and 12% so far in 2019. Shares in more income-oriented companies (like the electricity generators that make up almost 20% of the market) have received a lot of support from the lower interest rate outlook, with expectations of at least one OCR cut in 2019.
- Encouragingly, falling interest rates are usually supportive for companies and consumers alike. Companies that are looking to grow their business can get access to better funding, while falling mortgage rates are likely to provide some support to the slowing NZ housing market.
If you have any questions and would like to discuss this further, please speak to your financial adviser.
Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular investor’s objectives, financial situation or needs. Any opinions contained in it are held as at the report date and are subject to change without notice. This document is solely for the use of the party to whom it is provided.