By Michelle Dear, Co-Founder of Tandem
Investing is essential and one of the most efficient methods to grow wealth (yes, anyone can do it successfully), but wealth does not need to happen overnight.
In fact, I prefer slow and methodical.
However, one way to accelerate growth is to utilize the power of “2 is greater than 1”. If you have a partner that does not currently invest, encouraging them to invest their money alongside you is an easy way to double your future investment income as a couple so you are better set for the future.
The emergence and adoption of DIY investing platforms (e.g., Robinhood, Toro, etc.) has led to a wave of investing democratization and more specifically a shift in consumer preferences – new generations of consumers are enthusiastically embracing active over passive investing. This is exciting!
A strong understanding of how money is being invested is important and a worthy pursuit, but what is even more important is just getting started (whether you feel comfortable enough to invest actively or not).
(1) What makes investing so lucrative? Compound interest
“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.” – Albert Einstein
Compound interest is essentially your money making you more money for simply leaving it invested and doing nothing else. For example, investing $1,000 in year 1 and earning a 10% return = $1,100. In year 2, $1,100 earning a 10% return = $1,210 (given you are earning on the initial investment of $1,000 PLUS the $100 you earned in interest) and so on and so forth. Fast forward 30 years, you can see how the original sum you invested can grow substantially into retirement even, after accounting for market fluctuations.
(2) What is an easy, relatively low risk way to generate compound interest? S&P 500 Index Fund
Index funds are arguably the easiest, cheapest (in terms of fees), most diverse (minimal risk), and proven bang-for-your-buck investment vehicle.
Take the S&P 500, from 1926-2020 it produced ~8% returns per year (~30% and ~14% in 2019 and 2020, respectively, alone!).
Arguably more impressive, since 1926 the S&P 500 has grown in value 85% of the time over the course of any given 10-year time horizons and 95% of the time over 20-year time horizons.
Even though active investing (investing in individual stocks) has become much more popular, it’s extremely difficult to outperform the S&P 500 index fund over the long-term. You can always circle back to or supplement your portfolio with active investing when you’re ready (there are numerous cool platforms enabling this), but in the interim, don’t overcomplicate it…
(1) Compound Interest + (2) S&P 500 Index Fund alone is a powerful and a great place to start.
Hypothetically, let’s say you invest $3,000 now and continue investing an additional $3,000 each year thereafter for another 24 years. History suggests that by year 25 you will have profited ~$100K!
Now to make this even more powerful, if your partner has invested alongside you all this time, that would translate to twice the incremental profit (and a happy retirement on an island!)
To summarize, investing a smaller amount today is better than waiting to invest a larger amount tomorrow (due to compound interest you’ll miss out on). It’s all about getting started.
Lastly, 2 is greater than 1.
© 2021 Ride in Tandem, Inc. All Rights Reserved.
The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person. The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. Investing entails risk, including the possible loss of principal, and there is no assurance that the investment will provide positive performance over any period of time.