$10k invested at a return of 22% per year grows to over $500k in just 20 years. At Aikido we have a catalog of quantitative investment strategies which have performed this well in historical backtests.
Long Term Thinking
One of my favourite quotes is the following – “We overestimate what we can achieve in the short term and underestimate what we can achieve in the long term.” In the field of technology, this is known as Amara’s or Gate’s Law after both the Stanford researcher and Microsoft founder commonly used the term. This statement holds true in all walks of life, including investing. Therefore, we should adopt a long-term time horizon and not be swayed by fleeting higher returns.
In the case of most investors, the goal is long-term financial freedom. To achieve this, our actions must be in line with our objective. There is a famous research-backed investing adage that says that ‘time in the market beats timing the market’. Coronavirus is a prime piece of anecdotal evidence of this effect. The S&P 500 is up 12% in the previous year, in the midst of an unprecedented global pandemic. Since the March 23rd bottom, to the date of writing, it’s grown by 53%. An attempt at timing the crash would likely lead to you missing out on some of the best-performing months the market has ever seen. Consequently, invest unemotionally in a systematic strategy that has proven returns over the long periods.
Humans are not wired to think in terms of exponential growth. Take a moment to think about this question – how many times would you have to fold a single piece of paper so that it stacks from the earth to the moon? You might be shocked to hear that the answer is 45. Such is the power of exponential growth.
Compound Interest in Investing
Money management relies heavily on exponential growth. One impact of this phenomenon is a lack of understanding of our future debt obligations. The average credit card APR was roughly 15% in 2019 in the USA. At this rate, the debt would double in just 5 years. However, on the positive side, it means that your investments can also grow exponentially over time.
The above image shows how a hypothetical $10,000 would grow over 40 years at various rates of return.
- 8% – €217,245
- 10% – €452,593
- 12% – €930,510
- 15% – €2,678,635
From 1957 to 2018 the S&P 500 averaged roughly 8%. The initial $10,000 investment would grow to almost $220,000 at this rate. A marginally higher rate of return of 10% compounds to over $450,000 or twice the total amount of the 8% rate. At an average return of 15% per year, the initial investment would grow to an astonishing $2.68M.
Compound interest investing has proven to do miracle, long-term strategies. Our models have averaged between 14-22% compounding return in our backtest simulations over the past 20 years. Check them out here.