A lot of people become impatient when it comes to investing. I can’t blame them because we’re getting used to having things quick.
Hungry? Go to a fastfood or just prepare some instant noodles. Need to talk to a friend? He’s always just a text or call away.
Sending a document? You can scan and email it within minutes. Doing research? Open your browser and Google what you need.
So it’s no surprise that when it comes to making money, we expect to see instant profits. But that’s not how it works, particularly when it comes to investing.
Here’s an illustration that shows you why you need to be patient in growing your wealth.
Let’s say that you put P100,000 in an investment that grows at around 18% per annum. Do you know how long it will take for your money to double or become P200,000? The answer is around 4 years.
Most people will say that’s a pretty long wait, especially entrepreneurs. If you’re good in business, I’m sure you can easily double P100,000 in less than 4 years.
But how long will it take the same investment to make another P100,000?
Yes, you would only have to wait around 2.5 years. Now that’s still a bit long, but I know you’re already getting my point.
How about the next P100,000? How soon can your investment make that amount?
The next P100,000 will only take around 2 years to make.
Wait a little over a year more, and you’ll have another P100,000.
Because of the power of compounding, the next P100,000 will always come much faster.
In fact, that P500,000 you already have will become P600,000 in a little less than a year.
What does it all mean?
Investing is a marathon – it is a patience game.
The benefits are not instant, but comes much later, and only if you let the power of compounding work its magic.
So invest now, and let your money grow.
Remember that when it comes to investing – time is your greatest ally.
Postscript:
I know you’re wondering, what investment can give 18% per annum growth? The stock market and equity funds are your best candidates for this kind of growth.
As a concrete example, I bought Jollibee (JFC) stocks at P34 per share back in 2008. At time of writing in May 2014, it’s being traded at around P170 per share.
It took almost 10 years for our investment to grow from P100,000 to P500,000 in our illustration above.
If that P100,000 was invested in JFC stocks, it would have become P500,000 in just 6 years – imagine that!
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Thanks for sharing this. The power of compounding is what I really think making great investors rich. God bless!
True. I started buying JFC stocks at 76/share. That’s why also you should only invest your spare money, one that you are okay not to touch for long term.
I also bought JFC this month hoping to grow it by next 5-6 years.
Im waiting for my approval application to join investing in stock market.Thanks to this blog I’m inspired. God bless Sir Fitz
Hi Fitz! Compound interest is not applicable to UITF or Mutual funds right? so your money invested will not grow as fast as what you’ve illustrated. My question is can i do something about it? I’m planning to invest in ALFM Growth Fund or any BPI UITF Equity and do cost averaging, I thought before that compound interest works in mutual funds or UITFs like these but later on after analyzing how mutual fund works, I realize that there is no compound interest at all.
Thank you and I hope you can enlighten me!
Hi Angel, yes compound interest is not applicable in pooled funds.
But money invested in them can grow as fast as I’ve illustrated because they’re actively managed and the earnings are typically reinvested back which results to an internal compounding of returns.
If you plot the growth of share or unit prices of top pooled funds over several years, you’ll see that a smoothed line will closely resemble the illustrations above.
JFC is down at 199 now. Will it still continue to go down? Or should I just invest my 100k by Monday?
Im am confused… compound interest is not qpplicable in pooled funds .?? i.e. mf and uitf?
My understanding was, cokpound interest works both in mf and stocks…thnks.
I believe compounding has been an eternal truth since the beginning! If you “follow the money” as the expression goes, you will always see that the “big boys”place their funds where the returns are greatest. In my favorite pastime of option trading, we see a lot of newbies start with the idea that they are so mart that they can beat the market with options. The problem is, they are buying options and doing it the wrong way to boot!! A few get lucky with an early success or two. Time is also against those who buy options as a general rule. You can reverse that and put time on your side when you become a seller of options. Slow and steady wins the race, but it really is NOT all that slow. Knowing that the front WEEKLy series option will expire in one week and being able to pick point just out of range will allow you to sell premium and earn every week. It is not too difficult to earn a consistent 60% or more every year with a non-dividend paying stock or ETF as your underlying. You will earn less with a divy stock as the underlying but enjoy and even greater margin of safety. SO YES, time really is my friend when engaging in my favorite pastime. Now, if only I could do something about those darn gray hairs, so far I have found no way to slow down the clock!!!