When the term “compounded growth” is used in investment lingo, it’s about as appealing as watching paint dry; it’s boring. It sounds good, but it also sounds like some discipline is required - how’s that going to help me today? But mention the damaging effects that compounded growth can have on increasing debt levels, and people will tend to become more interested in the concept of compounded growth. Whether it’s on the asset or the debt side of your balance sheet, compounded growth essentially works in the same way.
Debt grows at a rate that is normally legally binding (if that wasn’t already evident by all the forms and disclosures required for credit purchase). Normally, debt will continue to expand each year if its growth exceeds the debtor’s payments. Asset values will normally continue to expand each year provided its growth exceeds the outlays from the investments. You as an investor can control the outlays, but not the asset growth.
Double Time
The table below illustrates the potential benefits of long-term growth. The amount of time it takes to double an investment of five-hundred thousand dollars into a million dollars ranges from a high of thirty-five years (earning a net 2% annualized return) to the low of seven years (earning a net 10% annualized return).
Even the smallest changes in today's net rates of return can have a significant impact on your potential long-term asset growth - the results can be staggering over longer periods. It's important for investors to understand this point and avoid paying excessive fees or engaging in counterproductive strategies that can potentially make a huge difference in long-term growth.
A 20-year time horizon in the above table is an appropriate example of the duration of today's typical retiree who is turning 65 (Approx 10,000 people will turn 65 every day through 2029).¹ The difference between earning a net annualized 4% or 6% return over twenty years is approximately $508,000, and the difference between earning a net annualized return of 6% or 8% over twenty years is approximately $726,000!²
Calculating the impact of compounded growth is a simple mathematical formula, however, applying its concepts to real life can be a different matter. Disciplined investing is involved, and it may not be exciting, but the long-term results have historically been worth the patience. At Carr Wealth Management, LLC, we take pride in our commitment to educate our clients on the potential benefits of long-term investing. The company offers investment management services that:
- Use Investments designed to potentially earn long-term capital growth,
- Use Investment vehicles that are low in cost, widely-diversified, low in turnover, and don't drag down investment growth.
- Avoid transaction-oriented or speculative investing strategies.
Please contact us for a no-charge initial consultation or if you have any questions about our company. In addition, please review our website to become more familiar with the services offered by Carr Wealth Management, LLC.
No strategy assures success or protects against loss.
¹ Pew Research Center
² Table assumes no withdrawals during 20-year period. Individual Retirement Accounts (IRA's) normally require minimum distributions beginning at age 70½ of the account holder.