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.
And when you go on to the year 20, you have already accumulated $672!
In real life, we don’t usually invest a lump sum of money once in a lifetime, but we invest a part of the money we make annually. So if you added another $100 each year, you would have accumulated $6,300 in 20 years!
And that is huge growth.
That is why Albert Einstein stated: “Compound interest is the 8th wonder of the world. He who understands it, earns it… he who doesn’t… pays it.”
And Albert Einstein was a very smart man – so smart that he produced the world’s most famous equation: E = mc2. A lot of people have this on their t-shirt but have no clue what it means.
And if he said that compound interest is the 8th wonder of the world, we better take advantage of it.
And most importantly, do it NOW!
If you invest $1,000 annually in an investment that averages a 10% annual return (the historical average annual stock market returns) you will have $198,393 in 30 years; but if you wait for just one year you will have accumulated only $179,357 – a $19,000 difference!
This is the consequence of procrastination.
A Japanese proverb says:
“The best time to plant a tree was 10 years ago, but the next best time is NOW!”
Start early! Every year you postpone your decision to start investing you are losing out. Big time!
92% of investors are losing large amounts of money when investing – without even being aware of it. And the main cause for that are The Six Dark Forces of Investing™. If you don’t learn what these forces are, you will never be able to invest profitably. Click here now to get to know them, and Darth Vader will seem like a good guy to you.