It’s Not Just Wealth That Compounds

Money For the Rest of Us

J. David Stein

Investing, Investing Podcast, Business, Economics, Economy

4.5 • 1.4K Ratings

🗓️ 19 June 2019

⏱️ 28 minutes

🔗️ Recording | iTunes | RSS

🧾️ Download transcript

Summary

How the power of compounding applies not only to wealth, but influence, expertise, and creativity. How non-monetary investments can lead to greater monetary wealth and satisfaction.

In this episode, you will learn:

Why the rule of 72 and the power of compounding are hindered by portfolio losses.
Why the sequence of returns impacts investment performance, but also our expectations.
How what we experience in the world is made up of separate glimpses and events.
What are non-monetary things that compound with time and why there are no short-cuts.
How to focus our attention on things that compound.
How non-monetary investments of our time can increase our monetary wealth.

Thanks to Vistaprint and Sleep Number for sponsoring the episode.

For show notes and more information on this episode click here.

[0:20] The dangers of oversimplified compounding schemes.
[4:30] Our experiences influence what we expect to happen.
[7:57] A picture made up of pictures taken through time.
[11:26] There are no shortcuts to forming experience.
[15:05] Influence is created by passing through time—not by purchasing it.
[18:32] Expertise, polish, perfection are all built by passing through time.
[19:41] Taking the time to invest in creative work through time.
[22:01] Time brings age—and that is okay.
[23:11] Passing through time brings wisdom and experience.

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Transcript

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0:00.0	Welcome to Money for the rest of us. This is a personal finance show on money, how it works, how
0:07.0	to invest it and how to live without worrying about it. I'm your host David Stein.
0:11.0	Today is episode 257. It's not just wealth that compounds with time.
0:17.5	The power of compounding. Save early, save often. The Rule of 72, these are ways to illustrate that more time investing can lead to greater wealth.
0:31.0	To be frank, though, the Rule of 72 is supposed to be simple, but I always
0:36.0	have to look up what it means. It means that if you divide 72 by your annual rate of return, that's roughly how long it would take to double your money.
0:46.9	If you have the fortune earned 10% per year investing, we divide 72 by 10. That means we can double our money in 7.2 years.
0:58.0	Rule of 72. I don't find it terribly intuitive nor terribly useful.
1:05.0	There's a recent article by Lance Roberts titled Everything You're Being Told About Saving and Invest investing is wrong.
1:13.0	And he points out that the media loves to share some of these simple savings.
1:19.0	He gives an example that was on CMBC.
1:22.0	Here's a quote. If you start at age 23 for instance,
1:24.6	you only have to save about 14 dollars a day to be a millionaire by the age 67 that's assuming a 6% average annual investment return. There was another example
1:38.1	from investors business daily. If you're earning 75,000 by age 40 you need 2.4 times your income or $180,000 in retirement savings.
1:49.6	Simple as that.
1:51.8	That assumes a 10% annual savings rate and a 6% annual rate of return. But it isn't
1:57.0	quite that simple. Robert says the power of compounding only works when you do not lose money. And that's because after you
2:08.3	have some losses, we're trying to follow the rule of 72 and it assumes you earn the same return every year.
2:15.4	We don't earn the same return every year typically.
2:18.3	And if we lose money, we have to earn that money back.
2:22.0	If you lose 50% in the market you need a 100% return to get back to even.
2:27.0	So you have $100,000, you lose half, it goes down to 50,000, gain 100%, you're back to 100,000. But if you lose 60%, you have to
	...

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