Persevering Through the Early Years of Wealth Creation
Young investors often embark on their wealth creation journey because they have grasped the power of compounding returns in theory and want to see it in practice. However, the early stages of this journey can be deflating as the expected growth is slow in coming. You diligently contribute money to your investment pot, but the balance seems insignificant.
Sadly, some investors give up on their investment strategy before witnessing the power of compounding. In this early phase, any new investment strategy with promising returns has the potential to distract them from their initial plan.
The danger is that they give up just before the snowball gathers enough speed to become dangerous.
Warren Buffett’s Success: Time and Compounding
Our minds are designed to think linearly while the investment world operates exponentially. For this reason, it can be challenging to extract the right lessons when we study models of success.
Warren Buffett, widely recognised as one of the wealthiest individuals and most accomplished investors of all time, serves as an example of the power of compounding. Often overlooked, however, is that Buffett started investing at ten and continued throughout his life, well into his nineties. The 80-year investment horizon significantly contributed to his massive wealth accumulation.
Attributing his success to solely his investment decision-making would be a mistake. Had Buffett followed the conventional path of investing from age 25 to retirement at 65, his story might have been different and less remarkable. The key to his success is that he’s been a phenomenal investor for three-quarters of a century.
The Only Way Out Is Through
It can be argued that time is a more critical input than investment returns when it comes to long-term investment success. Unfortunately, at the start of the investment journey, time has not yet been able to play its part.
For example, after ten years of regular contributions, two-thirds (or more) of your investment pot will likely be your contributions, with only a third being from the investment returns. If we extrapolate the same contributions for thirty years, approximately three-quarters of your portfolio will be attributable to the growth within the portfolio.
The only way to get to thirty years is by not giving up in the first ten years. As the American poet Robert Frost famously said, “The best way out is always through.
Accelerating The Process
The investment process is a life-long journey, and having realistic expectations when you set out is essential. Consistently contributing to the portfolio and maintaining faith in your investment strategy will ensure that the compounding effects unfold over time.
While you can’t skip this phase, you can speed it up. Instead of succumbing to distractions while waiting for tangible outcomes, investors can focus on increasing their contributions to expedite growth. Treat this initial phase as a “rite of passage” towards financial independence, using it as a learning opportunity and laying the foundation for future wealth.
Combined with consistent contributions, the power of compounding cannot be overstated. As you navigate these early stages, remember the impact of time and compounding on Warren Buffett’s success. Ultimately, wealth accumulation comes to those willing to persevere, remain consistent, and give their investments the time and space needed to grow. And so, for those in the early stages of wealth creation, we encourage you to keep the faith, do the work, and stay patient while you wait for compounding and exponential growth to become visible in your investment portfolio.
If you need any help navigating the early stages of your investment journey, get in touch with our advisors here.
