The Value of Great Advice
Otherwise known as the "Magic of Compounding".
Investing requires patience and faith – Faith that share markets will continue to reach new “all time heights” and the Patience to see it happen. The uncertain part in all this, is timing.
Reflected below are the returns from major investment sectors in the US since 1965 (while not NZ data, the differences between the two won’t be big). On average, in both markets, shares made 10%pa.
If we expect a 10% return in the next year or so, there’s a good chance we’ll be disappointed. Shares bounce around. And today, with all the chaos of a war in the middle east, heightened uncertainty simply pushes prices around a whole lot more in the short-term. Setting our expectations out for twenty or thirty years, a 10%pa average return is more likely.
Between 1965 and 2025 quite a few things have interrupted the trajectory of share markets. Through this time, interest rates have been at all-time highs (late 1980’s). They’ve also been to all-time lows (Covid). Wars raged, oil soared, share markets rallied (and crashed). Globalisation changed our world, and AI will change it again. The one constant is change.
Key Returns 1965 to 2025:
- Stocks (Shares) 10.40%pa
- Gold 8.40%pa
- Corporate Bonds 7.80%pa
- Government Bonds 5.70%pa
- Real Estate 5.10%pa
- Cash 4.50%pa
*Stocks reflect S&P 500 total returns with dividends reinvested, Real Estate follows the Case-Shiller Home Price Index (price only), and Cash represents three-month U.S. Treasury bills.
Is an extra 5% a year worth the risk from share markets? If we intend to use that capital in the next year or two, perhaps bonds are the better “low risk” option. But, when we start to think long-term, and compound returns over time, the reason for why shares is very apparent...
$10,000 invested at 10.4%pa compounds to $3,785,685 over sixty years. Compounding at 5.7% over that same sixty years, it would be just $278,290 – Yes, a difference of $3.5M!
Most of us will reach 60 years of age, so at some stage we have 60 years ahead. Indeed, most of us live beyond 60 and so, a well-placed investment early makes a very big difference, long-term.
In the first ten years of our lives, if our parents could put aside $1,000 a year into a scheme that delivered the average return of shares (implied as 10.4%pa above), by the end of ten years that annual saving will have compounded into $16,246. Leaving that now in place for fifty years with no further contributions, by age 60 it could compound into $2,286,700 (10.4%pa).
While not quite what $10,000 up front achieves over sixty years, it’s not bad. There are many variables (like tax and costs, and indeed inflation) which will shift the outcome. But the single biggest detractor to these possibilities will be our own tendency to change tactics, to not stay on course, and to be tempted to use the capital for other purposes. Life likely gets in the way.
10.4% is the historical average – some will do better; some will do worse. Long-term, the average will do just nicely. Making a start and staying disciplined is the hardest part.
The views and opinions expressed in this article are intended to be of a general nature and do not constitute personalised advice for an individual client.
