C.R.E.A.M.
I’ve made it clear previously that I have no real idea how money works. What I’ve been doing to change that over the last year or so is learning what I can on the subject and I wanted to highlight a concept which, to me, is so simple it’s brilliant:
Dollar-cost Averaging
You take a fixed amount of money every week/month/whatever and you invest it in an index fund or a business. Stock markets will peak and trough like it always has but over a long enough period you will see a healthy return on your investment.
Over the 10 year period between 2011 and 2020 the ASX grew 8.05% (12.4% in the S&P 500). This isn’t accounting for the wild days of 2021 and 2022 where we’ve seen value skyrocket and plumet in a matter of 18 months.
If you were to invest say $500 a month, every month, for this 10 year period in the ASX you would, on average, have tuned a total investment of $60,000 into $92,844.
I know right? Looks like I calculated 8.05% of $60,000 wrong… Shouldn’t it be $64,830?
This is where we get into one of the fundamental financial principles we all should know and love:
Compound Interest
Compound interest is also a brilliantly simple concept and one which Bruce Flat, CEO of Brookfield Asset Management said best in a 2022 AFR article:
“The compounding of returns is an incredible miracle of business, finance and human existence. Everything you do is additive, every day. And if you keep at it and don’t quit it’s an incredible miracle.”
Every month, you are depositing a fixed amount of money into your investment or portfolio. Every month, regardless of if the market is up or down, you are investing because in the end, all the lows and all the highs will average out and you will come out on top. We have over a century of stock market data in the US, and 35 years of it in Australia and in both cases the numbers have gone up over time.
That’s the hard part right? Time. What if you don’t want to sit on a pile of potential cash for 5, 10, 20 years plus? You want the return sooner: we would all love to double our money overnight, every night.
“Gold flees the [person]” writes George S Clason in The Richest Man in Babylon “who would force it to impossible earnings or who followeth the alluring advice of tricksters and schemers or who trusts it to [their] own inexperience and romantic desires to invest.”
Securing your initial investment — making sure that you can get back every $500 per month you invested — is far more valuable than some ‘romantic desire’ to get rich quick. That is the trade off: you take the time to do something and secure your principal, or you risk it all on a game of chance.
By my own admission I am not someone who has any right to dole out financial advice to anyone, so please do not consider any of this ‘advice’. What I propose here is that the concept of dollar-cost averaging should work: it’s objective, based on mathematics — not on emotion, highly rational and it is a far more affordable option.
“The best time to plant a tree was 20 years ago.” goes the proverb, “The second best time is now.”