If you haven’t lived on the dark side of the moon for the last decade, you have probably heard of the movie trilogy, The Lord of the Rings.
The main plot of the series revolves around a magic ring that has an extraordinary amount of power. It’s called the One Ring.
Its creator forged it to gain control over the remaining 19 rings of power that were worn by the rulers of the different races appearing in the movie. The other, lesser rings, were linked to the power of the One Ring, and were dependent on it. So, whoever wore the One Ring, could control all the other leaders wearing lesser rings.
Why am I telling you that? Because, in the world of investing, there is also a concept that rules all other investing concepts (sorry, I know that a magical investing ring would be more fun.)
If you understand this concept, you will understand long-term investing, and, ultimately, wealth building, and you will have the power to win the financial game of life.
If you don’t, then nothing will make sense, and the financial industry will always be able to take advantage of you.
The concept is called compound interest. Here is Wikipedia’s definition of compounding: “Compound interest is interest added to the principal of a deposit or loan so that the added interest also earns interest from then on. This addition of interest to the principal is called compounding.”
Here’s how it works in real life:
Let’s say that you invest $100 and your money grows by 10% annually on average. In the second year you have $110 and as you see in the following years the growth will speed up.
By year 20, that $100 will have grown into $672!
In reality, most of us don’t just invest a lump sum once in a lifetime. We typically invest a portion of our income each year. So, if you added an additional $100 every year, in 20 years, you’d have accumulated $6,300!
That’s significant growth.
This is why Albert Einstein famously said, “Compound interest is the 8th wonder of the world. He who understands it, earns it… he who doesn’t… pays it.”
And Einstein was a pretty smart guy—smart enough to give us the world’s most famous equation, E=mc². Lots of people wear that on their t-shirts without knowing what it really means.
If Einstein said compound interest is the 8th wonder of the world, we should definitely take advantage of it.
Now, Not Tomorrow!
And the key is to start NOW!
Why?
If you invest $1,000 annually in an investment that averages a 10% return (the historical average of the stock market), in 30 years, you’ll have $198,393. But if you wait just one year to start, you’ll end up with only $179,357—a difference of $19,000!
That’s the cost of procrastination.
As the Japanese proverb says:
“The best time to plant a tree was 10 years ago, but the next best time is NOW!”
So start early! Every year you delay your decision to invest, you’re losing out. Big time!
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