Invest early, invest long
Success in investing is doing two things. Investing early and investing long. Albert Einstein had said, “Compound interest is the eight wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
To give an example: An amount of Rs 1 lakh invested at a 12 per cent annual return will rise three-fold in 10 years, ten-fold in 20 years and 30-fold in 30 years. Your money invested today will multiply every year in 15-20 years.
But there’s a caveat. Warren Buffett has said: “Rule No 1 — Never lose money. Rule No 2 — Never forget Rule No. 1.”
Compounding formula breaks if investments are sold at losses, and all those gains that one expects to benefit from long-term investing vanishes.
In equity investing, compounding does not work straightforwardly. There are good times, and there are bad times. Investors tend to lose discipline, especially during bad periods, and therefore lose out on long-term benefits of compounding.
Hence, invest early and invest long.
How not to choose investments
How to do it the right way with index funds
Successful investors are ones who invest early and invest long. Index funds help in making this process easy, economical and effective.
The writer is head of passive funds, Motilal Oswal AMC