I was watching the news the other day and caught myself thinking that the 1% rise on the stock market for the day was a bit boring after all the excitement of recent months. My day job is at least partly about helping clients understand that obsessively tracking performance is a really bad plan if you want to achieve your long-term goals, so I don’t do this very often.
But somehow, I was tracking markets, looking at the volatility, and got caught up in the idea of 1% being a ‘small’ number.
But is 1% such a small move?
Imagine your investment went up 1% every day. Just an increase of one one-hundredth of its value by the close every day. Compounding, where you get growth on your growth, is important, but is 1% of your 1% growth every day enough to make a difference by the end of the year?
So, I did the maths. How much is something worth a year down the line. 365 days of 1% growth a day. Obviously, it will be more than 3.65x (365 divided by 100), so 1% daily is already pretty exciting. But how exciting?
How impactive is that compounding? Let’s start with £1,000 on the first of January.
Well, after ten days your £1,000 is worth just over £1,104, so already a small benefit of £4, but not exactly retirement money. After twenty days it’s £1,220, which gives me £20 of ‘free’ gain from compounding. At a month (thirty days) that 1% per day has reached £1,347 and I now have £47 of extra return, almost 5% of my initial investment. After 3 months (ninety one days) I’ve got £2,473, which is more than £500 of benefit from compounding.
A few more months takes us to six months, and now I have £6,116 – which is more than double the value without compounding.
At a year I now have an extraordinary £37,783. I’ve made 10x as much from compounding as I would have if I’d ‘spent’ my 1% each day.
At five years I’m now the 8th richest person in the world with a £77 BILLION return from my ‘measly’ 1% a day return, and after 30 years of working hard, surprisingly I didn’t break my spreadsheet, although I did need a tally pad to count the digits, and the total amounts to £208 tredecillions (which is 48 zeros if you’re still counting). I had to ask Google for the name of that number, so if it’s wrong, forgive me. If you too want enough money to buy not only the Earth, and everything on it, but at current estimated prices also every other planet and star in the known universe then all you need to do is invest £1,000 (or indeed £1) at 1% a day. With that much money you may cause a bit of inflation, so things may get a tad more expensive, but suffice to say you won’t be short.
Just from 1% a day.
Now, in case this isn’t clear, this is somewhat tongue-in-cheek, and I am not advising you to invest in things which will go up 1% a day, every day, because there aren’t any. Please bear in mind that 1% a day is incredibly volatile, and if an investment can go up lots, so too can it go down lots, possibly to zero, or worse. Do not invest in things you do not understand, and I am not writing about exciting investments here. Rather, it’s a reminder that given time, small numbers can become very big numbers indeed. At Walden Capital we truly believe that it is (to use an aphorism) time in the market, not timing the market, that provides for long term financial security.
In reality a good investment portfolio or pension investment is a bit boring. There are relatively few surprises. When the world goes up, so too should your portfolio. Sadly, when the world goes down you will experience that as well. Timing is hard, and most people get it wrong most of the time. The evidence is that most people who try to catch the ups and skip the downs, do worse than those who ride the rollercoaster all the way to the end.
Over the past five years the FTSE 100 has gone up more than 1% in a day 155 times, leaving 1105 days where there was either a loss, or a gain of less than 1%. Overall performance has been just over a somewhat lacklustre 35%, or 6% per annum. If you could just pick the days of 1% plus then your £1,000 would be £12,000, but if you missed those days and got the rest instead you’d have got just £80 back.
So clearly timing matters, and if any of you have a reliable crystal ball, I’d love to hear from you. But if, like me, your predestination skills are somewhat rusty, then the costs of getting it wrong can be catastrophic. Unfortunately, the number of people who get such timing decisions right closely matches the number you’d expect to by chance.
If you’re feeling a little nonplussed by my frankly ridiculous exploration of the impossible then I’d like to reassure you that navigating this map is the preserve of any good financial adviser. Transparency, time, control of costs, understanding your risks, a realistic understanding of the possible and a commitment to the journey are what is required, and if you ignore the distractions along the way, then you are far more likely to reach your destination.
If an investment promises to be exciting, that could be fun. Betting it all on ‘red’ is exciting. But it isn’t a good investment (or any sort of investment) because sooner or later the roulette wheel will come up black, and you’ll be back to square zero.
Walden Capital would love the opportunity to build you a bespoke plan, built from reassuringly transparent and understandable building blocks, and inspired ongoing advice to help you adapt to changes in the world or your circumstances. It may not be exciting, and it certainly won’t go up 1% every day (or even just go up every day, prices fall as well as rise and you may not get back the full value of your investment) but we will help you move towards your financial goals.