Investing well is important. However, investing well over long periods of time is most important.
Everyone would agree that making a one-time 50% return on an investment is a wonderful outcome. But making a 7% return each year for 40 years is a far better outcome, as it multiplies your initial investment by a factor of 15!
This is an important principal to remind ourselves of, especially at the moment when our lives (and, to some extent, markets) have been turned upside-down by Covid-19!
Even moderate returns over long periods generate massive wealth
The chart below published by Vanguard (click to
enlarge) calculates how much $10,000 invested in 1990 would be worth today.
The Australian (ASX200) index is currently trading at 5,985. If it grows at 2% p.a., what will its value be in 50 years’ time?
The answer: The ASX200 would be 16,100.
If it grew by an average of 4% p.a., it would be worth 42,500. Now, imagine it if grows by 8% p.a. – which is still below the 8.9% p.a. growth rate over the past 30 years. That would push the ASX200 index above 280,000!!
This simple example illustrates the beauty of playing the long game.
But to successfully play the long game, you must resist the temptation to get sucked into the incessant short term ‘noise’, worry and predictions.
I am usually sceptical when people tell me things have changed forever
The world is full of forecasts. At the moment, many commentators are telling us that the work-from-home (WFH) movement will result in companies deserting commercial office space en masse. And increased WFH will also result in a permanent increase in demand for regional property – since we don’t need to travel into the CBD anymore.
As Mr Buffett says, “forecasters will fill your ears but never your pockets”. You should be sceptical when anyone tells you that things have changed permanently overnight, because they rarely do.
Let me use WFH as an example
It is my view that WFH will have some impact on demand for commercial office space and, to a lesser extent, residential property in regional locations. But the size of its impact has been grossly overstated.
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