4. The Law of Compound Returns
The Law of Compound Returns is a force of nature and the basis for The System. Simply put, the Law of Compound Returns says money left alone creates more money. Understanding this concept is critical to your success as an investor.
Wall Street interrupts the Law of Compound Returns
Wall Street would have you believe that you need to interrupt this force of nature with heavy-handed human intervention and hefty costs that drain away your investment. Working counter to the Law of Compound Returns, Wall Street dooms you to failure. But it will succeed in taking your money-if you let it.
The System harnesses the Law of Compound Returns
It shows you a way to steadily grow your money with high rates of return, comfortable risk levels and minimal costs. The System also gives you the ability to measure your annual returns and see how you're doing compared with market benchmarks. (When's the last time your Wall Street advisor offered to do that?) The System is designed to help you make more, and keep more. Isn't that what investing should be?
Can you live without the expenses that Wall Street takes from your investment? When you use the Law of Compound Returns according to The System, your money is free to grow efficiently-without the oversized management fees and tax implications that are Wall Street's bread and butter (and caviar and steak).
Champions of the Law of Compounding
The wisdom the Law of Compounding has been subscribed to through the years. Einstein said, "Compound interest is the eighth wonder of the world," implying that Law of Compounding is in a force of nature. Ben Franklin echoed that thought, saying "...money is of a prolific generating nature. Money can beget money, and its offspring can beget more." Warren Buffett's partner Charlie Munger expressed a similar sentiment about money: "Never interrupt it unnecessarily."
How quickly will your money double?
Einstein's "Rule of 72" says if you take your yearly % return and divide into 72, you get the number of years it takes to double your money. Let's start with $100,000. If you have a 9% return (divided into 72), your money will double in 8 years ($200,000). In another 8 years, you would have $400,000, and so on.
An example of compounding
Let's say you are 40 years old and invest $100,000. You earn a 9% return the first year, so now you have $109,000. You reinvest your $9,000 and it continues to earn 9%, so you have $118,810 by the end of the second year. If your investment keeps growing at 9% (and you don't withdraw any of the gains), your money starts growing at an astounding rate.*
* Of course 9% is just an example, but it is consistent with the average annual compounding rate of the U.S. stock market over the past (80) years.
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