In 20 years, with even the most conservative of projections, it’s possible to double your money. With slightly more ambitious projections, your money could triple. The problem: You’ll never see these kinds of returns.
Why? Due to what Steve McDonald calls “rabbit investing”: Small investors are not patient enough to let their investments sit and reap the benefits of compounding. Check out today’s Two-Minute Retirement Solution to see how you can beat the small investor.
Einstein called it one of the wonders of the world. It appears to create money out of thin air. And, given time to work, it really is a wonder.
My colleague Kristin Haugk, research analyst with The Oxford Club, wrote about this back at the end of July.
It’s the simplest and maybe the single most documented investment strategy in the whole money world. Yet, it is totally out of the reach of most investors – small investors, that is.
Too bad, because it truly is amazing!
At only a 4% return, $1,000 doubles in just 20 years. At 6%, it more than triples in value. And at 8%, its value increases by 4.5 times.
I know returns like these are peanuts to those of us who were accustomed to 15% a year from stocks back in the ‘80s and ‘90s. But, after seven years of 0% to 1% and 2% yields, 4% looks pretty good.
But the reason for focusing on compounding this week isn’t returns; it’s the fact that it doesn’t work for the little guy. This time-proven miracle of money is truly out of reach for the vast majority of small investors. Here’s why.
The Pitfalls of Rabbit Investing
The simplest and most successful strategy in the money world can’t work because most can’t stay put long enough to allow it to perform its magic.
I call it “rabbit investing.” And here’s a perfect example of it from one of my bond readers. And believe me, this guy is not the exception.
He described how he bought one of my bond recommendations and then sold it when the market tanked a few months back. He then bought another oil-related bond and sold it when oil tanked.
Then he dutifully bought back the oil bond when crude started to show life in mid-October.
Now, let’s ignore the effects of emotional trading, which is what this is.
Let’s also ignore all the reasons why you own bonds in the first place, which is to take advantage of compounding.
And ignore trying to time the market, which is what all this rabbitlike jumping in and out of investments amounts to.
Ignore all of those factors and let’s just talk about how this, the most common error of the small investor, negates compounding interest.
It kills it. You can’t jump in and out of the market, interrupt the time factor of compounding and expect to get the results Einstein marveled at. It can’t work.
And as I said, this rabbit behavior is not the exception. It truly is the rule for the small investor.
I can show you all kinds of research and charts that will prove how much money you can make by using the simple concept Einstein raved about. But it would be a waste of time. The rabbitlike investing behavior of most will void the returns.
As a retired person or a person planning to retire, if you can’t retrain yourself to think in terms of the long term and give compounding a chance to work, you’re doomed. You’ll never make any money or, worse, you’ll end up in cash.
Compounding truly is a wonder, but one that the small investor’s behavior has put out of reach.
If this describes your investment style, start retraining yourself now!