Читать книгу Ignore the Hype - Brian Perry - Страница 26

The Grand Canyon is one of the world's most iconic sights. I've known many people who have visited, and none have ever come back disappointed. The sheer immensity of the crevice gouged from the earth boggles the mind. Standing on the cliffs and looking at the floor of the canyon 6,000 feet below, you see the Colorado River. At that height the river looks small, which makes it even more amazing when you stop to consider that it's that river that created the canyon.

The river is heavy with sediment and over the course of some five or six million years, it has gradually ground away at the surrounding rocks. The result is an ever-deepening ravine. The present view, the one that draws millions of visitors from around the world to stare in awestruck wonder, is the result of that river.

Of course, six million years is a long time. If we were able to step into a time machine and flashback to the point at which the Colorado River first began its work, the resultant view might not be very impressive. Sometimes, great doings take a while.

Such is the case with compound interest. Just as the silt in the river eventually carves a magnificent canyon, so, too, does compound interest turn small sums into large fortunes. Unfortunately, though, the urge to shift in and out of markets often prevents people from enjoying the true benefit of this magnificent power.

Figure 2.1 S&P 500 (1927–2019)

SOURCE: Data courtesy of MacroTrends Data Download.

Let's take a look at what compound interest can do across long periods of time. We have data going back to the 1920s, and we can use this information to measure progress and performance. Of course the world was very different back in the 1920s, but it's helpful to take a look at a long data series because it incorporates many different political, economic, and financial environments.

The message that data gives us is quite clear: over very long periods of time, investors who resist both the urge to speculate and the urge to panic do very well, indeed (see Figure 2.1).

What's really interesting about the chart is that it doesn't look like anything happens until about 1980. This is an illusion, given the scaling of the chart, but the visual also demonstrates a deeper lesson. Just as the Colorado River did its work for countless millennia before creating one of the most impressive sights on earth, compound interest does much of its work in the background. For years, its effect might not be apparent. But when its impact does burst forth, the effect can be magnificent.

The chart also shows that there have been bad times over the past nine decades. Undoubtedly, there have been many periods during which it was tempting to abandon the market until it was “safer.” With the power of perfect foresight and the ability to consistently time your way in and out of the market, this might've been a good approach. But as will be discussed in greater detail later in this book, that perfect foresight is a very rare commodity.

So, if we work off the assumption that you don't have the ability to see with perfect clarity what the future holds, it becomes clear that, despite the many fluctuations the market has encountered, the long-term trend has been higher. What that means is that if you want to achieve success, you must participate in the financial markets even though doing so will undoubtedly subject you to a great deal of volatility and perhaps even some sleepless nights.

Remember, having a portfolio that fluctuates in value has almost never prevented someone from meeting their financial goals. However, not benefiting from the power of compound interest and the long-term upward trend of financial markets has prevented many people from living the life they deserve.