Compounding is one of the most powerful forces in the world.
Just ask Albert Einstein, who’s said to have called it the “eighth wonder.”
The seemingly small decisions we make every day gain power over time. That’s why it’s important to take the long view and come up with a plan – in both wellness and investing.
This creates momentum in the direction of our goals. Don’t squander the power of time when you can recruit it to work in your favour.
Most of us understand that little things add up. Nowhere is this more evident than in our exercise and nutrition habits.
Trading just 10% of your calories from meat for calories derived mostly from plants can extend your lifespan.1
And don’t feel like a failure if you can’t reach 10,000 steps per day. Another study shows that 4,000 are enough to reduce the risk of dying from any cause.2
The bottom line? What we do today really matters in the future.
No one expects to get stronger by lifting weights just one day per month. But when it comes to investing, there are folks who think the occasional big win is their ticket to success.
This is simply not true. Just as your muscles benefit from the incremental increase in strength that comes from consistent training, so too do your investments benefit from a long-term time horizon.
Because when it comes to investing, compounding means more than little amounts just adding up. The potential exponential growth provided by compound returns proves that time is literally money.
Let’s say two people decide to make a one-time investment of $10,000 with an average annualised return of 9%. One is 30 years old, and the other is 40.
When they reach age 75, the investor who started at 30 will have $483,000, while the one who started at 40 will have $204,000.
Those extra 10 years invested in the market turn out to be worth more than $200,000, even though the initial investment was the same. And keep in mind that the extra return only comes if you stick to your plan and stay invested in the market.
Don’t settle for the status quo when you can do just a little bit better – because a little bit becomes a lot over time.
Now let’s factor in the importance of how you choose to invest your money.
Different strategies have different objectives. An index fund, for example, seeks to track the returns of a specific index, whereas a flexible, factor-based approach seeks to outperform its benchmark.
Just a 1% increase in returns makes an enormous difference. We just looked at compound returns resulting from a 9% annualised return.
What about investing the same amount of money for the same amount of time, but at a rate of 10%? Instead of ending up with $483,000, the investor who started at 30 ends up with $729,000. Yes, you read that right.
So make investment decisions very carefully. Don’t settle for the status quo when you can do just a little bit better – because a little bit becomes a lot over time.
In one of the year’s best-selling books, Outlive: The Science and Art of Longevity, physician Peter Attia writes that “Sometimes doing nothing is the riskiest choice of all.”
He’s talking about being proactive about your health, but the same is true in investing, where we talk about “opportunity cost.” Every minute your money isn’t invested in the market is one in which it can’t compound.
Economics is the science of making choices. Considering how many choices human beings are required to make every day, we’re all economists.
With advances in medical science, many of us are living longer, healthier lives than ever before.
This means it’s more important than ever to invest for the long term. Because with good habits, even if you didn’t start investing at age 20, you may get those 10 extra years of compound interest after all.
1 Katerina S. Stylianou, Victor L. Fulgoni III, and Olivier Jolliet, “Small Targeted Dietary Changes Can Yield Substantial Gains for Human Health and the Environment,” Nature Food (August 2021): 616–627.
2 Maciej Banach, Joanna Lewek, et al. “The Association Between Daily Step Count and All-Cause and Cardiovascular Mortality: A Meta-Analysis,” European Journal of Preventive Cardiology (August 9, 2023).
The information in this material is intended for the recipient’s background information and use only. It is provided in good faith and without any warranty or representation as to accuracy or completeness. Information and opinions presented in this material have been obtained or derived from sources believed by Dimensional to be reliable, and Dimensional has reasonable grounds to believe that all factual information herein is true as at the date of this material. It does not constitute investment advice, a recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. Before acting on any information in this document, you should consider whether it is appropriate for your particular circumstances and, if appropriate, seek professional advice. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized reproduction or transmission of this material is strictly prohibited. Dimensional accepts no responsibility for loss arising from the use of the information contained herein.
This material is not directed at any person in any jurisdiction where the availability of this material is prohibited or would subject Dimensional or its products or services to any registration, licensing, or other such legal requirements within the jurisdiction.
“Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd., Dimensional Japan Ltd., and Dimensional Hong Kong Limited. Dimensional Hong Kong Limited is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services.
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.
This material is issued by DFA Australia Limited (AFS License No. 238093, ABN 46 065 937 671). This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person. Accordingly, to the extent this material constitutes general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. Investors should also consider the Product Disclosure Statement (PDS) and the target market determination (TMD) that have been made for each financial product either issued or distributed by DFA Australia Limited prior to acquiring or continuing to hold any investment. Go to dimensional.com/funds to access a copy of the PDS or the relevant TMD. Any opinions expressed in this material reflect our judgement at the date of publication and are subject to change.