Saving and Investing is a Super Power
Money is a sensitive topic to talk about isn’t it, and unless you work in the financial sector it is a pretty awkward subject to bring up with just about anyone. Since no one really talks about it, it seems like maybe it’s not that important. I think that finding an interest in investing is truly a super power with all this secrecy going around. I know you have that super power in you.
What makes it a super power is that it won’t reveal itself as a super power until later, much later. At first, when you start to save and invest you will feel powerless and it may even feel pointless. ‘Who cares I set aside $1000, that’s not a lot of money’, you’ll say. You may have it invested, and its market value could go down. ‘What’s the use!”, you’ll say to yourself each time you lose money. There will be many times when it will seem FUTILE. The super power happens when all those feelings of hopelessness are set aside and you continue to save and invest despite the mixed signals in the news and despite what your gut is telling you to do. It is a super power to keep on doing it because of the news telling you that “cash is king”, or that only real estate is a real investment because you can see it and touch it. Saving and investing in the stock market is a very abstract concept, and the ability to see its growth potential and imagine the effects of compounding is not easy. Let’s use the help of a compound interest calculator to help us see this super power in action.
Let’s assume you started working and after a year, you managed to save $500. You’ve opened a self-directed RRSP and have a bit of contribution room. You add $500 to your RRSP and for the next 40 years you add $500 every year. You are young and new to investing but heard that investing in a stock market index is a good idea because you basically own many companies at once. Perhaps you purchase an S&P500 ETF index every year with your $500. Your total cash investment after 40 years is $20,000. Many of you will not consider $500 a lot of money, it looks manageable doesn’t it? I’m sure you can do that and have the motivation to do even more. How much do you think you’ll have after 40 years of letting your money compound? We have to make some assumptions here however, we have to imagine that the stock market will return let’s say 7% on average for the next 40 years. If you are lucky enough to get a 7% return on your money, your $500 per year investment would turn into $105,902.58. Isn’t that amazing?
Take the time to play with this compound calculator and figure out how much you can save per year. Make sure to use money you can part with for decades. The best result is if you save more than less of course, and much depends on stock market returns (something you have no control over). Investopedia is a good resource to look up handy information about investing. I used a 7% return because “adjusted for inflation, the historical average annual return is only around 7%”.
After 40 years of saving and investing your stock portfolio can be chopped in half. I know, totally sucks! Let’s assume this happens but you are patient and will wait for a market recovery. According to Greg McBride: “Typically, it takes stocks an average of 121 days, or four months, to recover from a correction. If a downturn becomes a bear market, which is when stocks fall 20 percent or more from a high, it takes an average of 22 months, which is less than two years, to recover.Dec 19, 2018”
You don’t have control over what the stock market hands you, I guess it is a huge leap of faith, one that I took many years ago and I’m not going to lie, it’s a crazy ride. As Morpheus said in the Matrix, “Free your mind”.