I’d follow Warren Buffett and take advantage of the ‘eighth wonder of the world’
I’d follow Warren Buffett and take advantage of the ‘eighth wonder of the world’
by Ben McPoland
Getting started
I find it amazing that anyone can start investing quite modest sums every month and work their way to a million pounds in around three decades.
This would entail investing £125 a week (or £6,504 a year) and securing an annualised 8.5% return.
We can see how the large the compound returns start to become over time. Indeed, this £1m would double in around another seven years, if allowed to continue compounding without interruption.
This is the real power of compound interest, and it explains why Warren Buffett has generated over 90% of his wealth since he turned 65.
Unpredictable
Now, there are a couple of assumptions and caveats here. The first concerns the 8.5% return. I’ve used that because it’s the long-term average return of the FTSE 100 (7%) and S&P 500 (around 10%) combined together.
I believe investing in both indexes would give me better diversification. But there’s no guarantee that they’ll produce such an average return over the next 30 years. It could well be less (or more).
Second, both of these figures are total returns, with dividends reinvested. The easiest way to emulate this is through a low-cost index tracker that reinvests dividends back into the fund (known as accumulating) rather than paying them out (known as distributing).
Finally, the annual returns from the stock market are highly unpredictable and non-linear. For example, the FTSE 100 went up 12% in 2019, before declining 14% the next year. Then it rose 14% in 2021. Last year, it basically ended flat.
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