The speed of growing wealth is governed by the rate of return. A higher rate of return per year has a dramatic affect on the bottom line.
The magic of compounding has been well known by professionals in the finance industry. Banks love leveraging your money for their benefit of compounding wealth. Take money in, rent it out for higher rate and repeat. Over time, they amass a large amount of money. That's their business.
Here's why it should matter to you.
| Rate of Return | Years to double | Years to be 10 fold |
| 2% | 36 years | 117 years |
| 4% | 18 years | 59 years |
| 5% | 14 years | 48 years |
| 10% | 7 years | 25 years |
| 20% | 4 years | 13 years |
The first column is the rate of return. The second column is the number of years for that money to double. The third column is the more interesting column since that says how long it will take for the money to be worth ten times more than the original amount. And really, 10 x original is a good minimum target if you are thinking of a retirement program.
If you're getting 2% per year, inflation and taxes on that 2% gain would mean you are losing money. At 4% you still aren't breaking even after taxes. The dollar is decaying. It's better than "under the mattress" but isn't doing much for you.
At 5% this is just about equal with long term average inflation, and here it would take 48 years for that initial amount to be worth 10 times more. However, the taxes on the gains would knock it back to about half (depending on when that taxes are due). If they are due at the end, that's better for you. The money is growing for you during that time. If taxes are due every year, then treat that like a lower rate of return. That means if the normal rate is 10% and the taxes are half of the profit, then the "rate" would be half. Looking at 5% rate means it takes 48 years to be useful, however, inflation would make that money the same buying power as today. In the simple terms, if you need to pay tax on the money, you need to get a higher rate of return proportional to those taxes.
At 10% per year, you're going nowhere
The long term return on the stock market (using the DJ Industrial Average) is about 7.7% for the last 10 years. Some decades are better or worse, but an average of 7% is good one to work with. And inflation is about 2%. The Financial Post thinks the next 25 years should see a net gain (after inflation) of about 6%. The numbers for inflation can be very far off when housing prices are factored in. Real estate prices in many cities is 6% per year. That's great if you own a house and not paying the bank for the mortgage. If you're buying a house later on, then the mortgage interest might be a problem for the first years.
Some billionaires (Peter Schiff) won't buy a house because it's too low a rate of return. Since he is getting better results outside of real estate, he puts his money in the better places and not in a house. It's that type of thinking that helped him be a billionaire. So what does an "average" person do to get ahead?
6% isn't going to make you get ahead. And 10% is a bit faster but won't make you a billionaire (or millionaire) by retirement. People like Warren Buffett have consistently attained higher rates of return, and that's exactly what moved him from millionaire to billionaire. To move from millionaire to billionaire is 1000x the original amount. At 20% this would take 39 years. At 5% it would take about 200 years. If you think about the cost of a farm 200 years ago, versus now, it's easy to see how that is "normal" price increase and is just keeping up with inflation.
Some have achieved their billionaire level through business. In some cases they caught a once-in-an-era opportunity and that can't be repeated. Investing and trading can be repeated.
If you leave the investing decisions to someone else, they will be in control of your destiny and typically you get an average retirement at about 7% per year. However, with some learning and effort, you can take charge of a better destiny. The caution of course is that it's now in your hands. The truth is: it was always in your hands. If someone else is running the investments, those results are by your decision.
Get a good mentor that is successful and follow their blueprint. That's worked for Warren Buffett and many other successful investors and traders. Be sure to test your skills first.
