One of the great wonders of investing is the concept of compounding. We encourage all our clients to continually have a “pay me first” mindset and save regularly to take advantage of the compounding effects that the market provides over time. For example, Warren Buffett who is known as one of the most successful investors of our time has made over $100B in his lifetime. The interesting fact that many people do not realize is that 90% of his wealth compounded after his 60th birthday. This illustrates the power of compounding. Building wealth early can really make life easier down the road.
One of the best ways for many investors to make sure they are taking advantage of compounding is to invest on a regular basis. We find this very useful as clients simply build into their budget an investing “expense”. This way it comes off their regular income and gets invested right away, making investing in the stock market a lot easier than saving up and making a lump sum investment once per year.
This is called dollar cost averaging, meaning that no matter what the market is doing you will always invest once per month (or week or whatever period you choose). If the market is up, you buy investments. If the market is down, you buy investments. Every single week or month. This also takes trying to “time the market” out of the equation which is very hard to do.
We encourage anyone that is trying to build wealth to consider this “pay me first” strategy to save regularly and enjoy the benefits of compounding and dollar cost averaging.