It’s a well-known fact that investing is one of the most important components of saving for retirement and achieving financial freedom. However, it’s not just about buying stocks and hoping they increase in value. Investing allows you to put your hard-earned capital to work and benefit from the power of compound returns.
In fact, compound returns are one of the most powerful forces in investing, enabling even small investments to grow exponentially over time.
So, although selecting high-quality stocks is, of course, important, it’s just as crucial to begin investing as early as possible to maximize your timeline for growth. The earlier you start, the greater the impact, as your returns begin generating returns of their own, creating a snowball effect that accelerates wealth accumulation.
No matter where you are in your investing journey, taking advantage of compounding as soon as possible can make a massive difference in your long-term results. Even if you can only invest small amounts now, time in the market is far more important than trying to perfectly time your investments.
So, with that in mind, let’s break down exactly why compound returns are so powerful and why getting started today is the best move you can make.
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What makes compound returns so powerful?
The concept of compound returns is simple. When you invest, your money earns returns, and then those returns start generating returns of their own. Over time, this creates a snowball effect, leading to exponential growth that becomes more powerful the longer you stay invested.
For example, if you invest $100,000 and earn an average annual return of 8%, you’ll have $215,890 in 10 years. But if you leave it for 20 years, that same investment grows to $466,100. And if you keep it invested for 30 years, it skyrockets to more than $1,000,000 – without you adding another dollar.
Therefore, it’s essential to begin investing as soon as possible. The most important factor in compounding is time, so the sooner you start, the more powerful those returns become.
And even if you’re starting later, the best thing you can do is stay consistent. It’s essential to contribute regularly, reinvest dividends, and stay invested through market ups and downs in order to help maximize the benefits of compounding.
And if you think you’ve missed the boat, consider that investing just $6,000 a year at an 8% return for only 20 years will grow to over $295,000. Stretch that to 30 years, and you’re looking at over $734,000 – all from steady, consistent investing.
The key to taking advantage of compounding
The biggest mistake investors make is waiting for the perfect time to start. Markets go up and down, and economic uncertainty will always exist, but the longer you wait, the less time your money has to benefit from compound returns.
In addition, though, while time in the market is essential, choosing high-quality stocks with strong long-term potential is just as important. Furthermore, it’s crucial to avoid stocks that may be popular today but lack sustainable growth over the long haul.
The higher the quality of the stock, the faster and more consistently it will grow your money.
For example, one of the best stocks to buy in Canada is goeasy (TSX:GSY), the specialty finance company. goeasy is one of the best to buy because it constantly expands its operations and increases its profitability, leading to significant returns for investors who are holding the stock for the long haul.
Consider that over the past five years goeasy has earned investors a total return of 171%, which is a compound annual growth rate (CAGR) of roughly 22%. However, over the past 10 years, GST stock earned investors a total return of 830%, even though its CAGR over that stretch is only slightly higher at 25%.
This shows exactly why it’s essential to find high-quality stocks that can grow rapidly and consistently and hold them for the long haul. Not only does goeasy’s stock grow at an incredible pace, over 20% per year. But because it’s also grown consistently, it’s earned long-term investors a massive return.
Therefore, if you’re looking to build wealth by investing in the stock market, it’s essential to begin saving your money and putting it to work as soon as possible to maximize the power of compound returns.
