Time, discipline and a bit of luck are all it takes if you want to make millions investing.
Compound Interest is the most powerful force in the universe
That’s what the German physicist Albert Einstein is thought to have said. And for a man who founded the theory of relativity, that’s no small thing.
Compound interest is the main reason why even relatively modest annual returns can create a fortune. That is, if you have enough time. Many investors tend to think they need double-digit rates of return before it pays off. But even with a market return, you can create a profit of millions that eventually grows by hundreds of thousands of dollars a year.
So you don’t have to bet at high risk to try to beat the market. If you can, that’s good, but studies show that many fail. Even the professionals.
How do you do it? There are all sorts of caveats. The world can come crashing down. No one knows what will happen tomorrow, etc., etc. We have history to go by, so we do. Over the past 30 years, the MSCI World stock index has returned 390%. Or an average annual return of 5.44%.
MSCI World reflects the performance of stock markets around the world and is therefore considered one of the safest investments in the stock market. If one sector, company or part of the world falls, all the other sectors, companies and parts of the world weigh in. Conversely, you don’t get the sky-high returns that you might be lucky to get by hand-picking.
You can invest in MSCI World at low cost, so let’s say the next 30 years go more or less the same way. Then your annual return will be at least 5% after costs.
You have 30 years, a starting capital of DKK 10,000 and the option to put aside DKK 3,000 a month. During the 30 years, you only increase the payments in line with inflation, let’s say 1.5%.
If you do not invest the money, after 30 years you will have 1.26 million DKK in your account. If, on the other hand, you invest the money and earn an annual return of 5%, compound interest will mean that your assets will have grown to DKK 2.79 million. So the interest income alone would amount to DKK 1.53 million.
Finally, compound interest is so strong that the interest income from the 29th year to the 30th year is DKK 131,000. If we let the investment run for another 10 years, the assets will almost double from DKK 2.79 million to DKK 5.2 million.
If you are more willing to take risks and succeed with an annual return of 8%, you will have invested DKK 1.77 million in 40 years. But with compound interest, your assets will amount to DKK 11 million.
And in 50 years – say, from age 25 to 75 – a 5% annual return would give you DKK 9.2 million, while an 8% return would give you €24.7 million.
If you are a super-investor making 15% returns year after year, after 50 years you will have no less than DKK 311 million.
Try to make a few calculation examples with this calculator.
