Compound Interest

When it comes to wealth accumulation via Index Funds, the fundamental principle is this:

Don’t try to “time” the market.

It’s time in the market that counts…”

Just about every finance guru

The gains that compound interest can deliver to young professionals do depend on duration i.e. time in the market. It’s not about days, it’s about decades.

And therein lies the problem. Our “lizard brain” can’t wrap its thinking around how wealthy you might be in ten years’ time. Due to hyperbolic discounting.

To counteract that lizard brain, you need a visual masterclass in the realities of compound interest and how it relates to your investments. Here it is:

Courtesy of: Wealth 101

What are some reasonable conclusions that we can draw from that infographic? Here’s a few:

  • Compound interest exists – whether we like it or not
  • To compound wealth, the earlier you start the better
  • The key thing is to start: which anyone can do with a small amount of money and an internet connection
  • Compounding requires two things: consistency and patience. Consistency in terms of making regular, monthly investments. Patience that is measured in terms of decades, not days.

Successful investing is the epitome of “delayed gratification”. that psychologists measure in “The Marshmallow Test”.

Your Index Funds are the equivalent of a warehouse of “financial marshmallows”.

The test, as ever, will be to ignore touching those Index Fund marshmallows for years to come. Which is difficult at first, but the longer you invest for, the easier it becomes.