After a recent conversation with a client about the 20-year expected growth of their portfolio, I thought it would be important to review the basics of compound interest. The conversation started after the client asked, "If I saved $20,000 for 20 years, I would have $400,000, correct?"
I decided to create a short video explaining doubling periods and how it's hard for the human brain to comprehend. It's extremely difficult to imagine what indexes will be trading in 30 years, 40 years, 50 years, and beyond. Although I wasn't alive in 1950, the S&P 500 index was trading at 17. Yes - 17. Today it's between 2600-2700.
Now to the weather. The Detroit Free Press ran an article stating that there is a new record low for January 30th of minus 6 degrees that beat the previous low of minus 4 in 1951. The same 1951 where the S&P 500 index hit 20. It would take all day (or longer) to list the changes that have taken place since that time. However, one thing remained - the market continued to double. Through wars, terror attacks, different presidents, and other "smart sounding reasons to sell" out of stocks.
The moral is, it's hard for people to comprehend what changes have occurred since the last record low temperatures, and it will continue to be difficult to think of what changes will come in the future. However, it's important to at least be aware of doubling times, compound interest, and how investors should position themselves to take advantage of it.
Included in the video are the following simple concepts:
Would you rather have $1 million today OR 1 penny that doubles every day for 30 days?
What was the S&P 500 index trading at 30 years ago and how many times has it doubled?
Although people have probably heard of the penny analogy, it's still a good refresher on thinking about doubling times.