What caught my eye this week.
Now and then an investing writer will take aim at a staple of the genre – all those articles proclaiming the ‘miracle’ of compound interest [1], which detail how Precocious Pete who starts saving at 20 will trounce [2] Tardy Tarquin who doesn’t get going until 40.
Nonsense, the doubters say. Pete hasn’t got a bean to spare, and Tarquin is rolling in it. Compound interest won’t do much for either of them (apparently). Instead it’s all about savings.
It’s basically shock jock blogging. Slaying the sacred cow to the awed gasps of onlookers.
And too bad if those onlookers get splattered in blood.
Okay, so there’s some truth in what these iconoclastic articles – which at best champion saving over investing, and at worst throw in the towel – say.
If you have £1,000 and you compound it by 10%, you still only have £1,100. Nobody is retiring on that.
In contrast nearly all 20-year olds reading Monevator can find £100 down the back of the sofa.
Ergo, like a complication-free hookup, compound interest is a myth that will do little for you until you’re too old to be bothered with it.
So forget about it! Save more when you (hopefully) earn a lot more in your 50s. Go to the beach instead.
I paraphrase but that’s the gist.
Them versus us
I’ve noticed these articles tend to be written by three kinds of people:
- Young people with little yet in the way of assets who wonder where’s their snowball?
- Older people who stumble into income or assets in later life, which transforms their finances.
- (Usually much) older people who never saved enough to retire early, and seem cross about it.
Notably not on the list are people who did start saving in their 20s. Who saw their snowball. And who now tell you compound interest can do a lot of heavy lifting.
People like me!
I was a regular saver from my teens. I’ve never earned six-figures, and most years didn’t trouble the higher-tax bracket (albeit later thanks to pension contributions). I mostly lived in London, which is expensive.
On the other hand I didn’t have kids, a car, or a drug habit.
And by the time I hit my 40s, my portfolio’s average annual return – the compound interest bit – was more or less equal to my earnings, net of tax.
Undoubtedly I made sacrifices to get there. Maybe I was too frugal [3]. There are reasons [4] why what seemed to me a generously-provisioned life [5] would cause others to chafe. I’m a good enough (active) investor, which also helped.
But none of that disproves the impact of compound interest.
Roll the calendar another ten years and even despite a horrible 2022 – for my portfolio, my earnings, and my mortgage rate – I’m still (touch wood) set fair.
Savings played a big part in this journey. But I’ve never earned enough to be set without compound interest helping out too.
For sure I’m glad the books I stumbled upon in my 20s hit me over the head with a graph that went up and to the right, thanks to compound interest.
Rather than one that told me not to bother – not until I’d climbed over enough rats to get high enough up the greasy pole to stick at it and save in my 50s, 60s, and who knows maybe into my 70s.
Saving versus interest versus time
In my view savings and investing – and fitting your budget [6] to suit your goals – are all important.
Doh, you say. (Unless you’re drafting your anti-compound interest post as we speak?)
Elsewhere ever-reliable Nick Maggiulli tackled this savings/investing duality in a novel way this week [7], with what he calls the ‘Wealth Savings Rate’.
It’s a way of seeing how your pot will grow (double) through adding new money via savings, as well as through compound interest.
Early on your Wealth Savings Rate is high. New money moves the dial materially.
But later, a whole year of extra savings might amount to one or two percent of your portfolio’s value. It’s the compounding that’s motoring you forward. By then you can run the numbers on leaving work [8] if you want to.
Nick shows how long it will take to double your money under different saving and return scenarios:
[9]It’s a cool lens he’s come up with, and one I can’t remember looking through this clearly before. Check out the full post on Nick’s blog, Of Dollars and Data [7].
And do keep saving and investing if you want to be financially independent sooner rather than later!
Have a great weekend.
From Monevator
How quickly do equities and bonds bounce back after a bad year? – Monevator [10]
UK dividend tax explained – Monevator [11]
From the archive-ator: Status anxiety – Monevator [12]
News
Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.
Energy Price Guarantee expected to be extended in April – BBC [13]
Chip giant Arm to list in New York in latest blow to London – CNBC [14]
Pensions dashboard hit with further delays – AltFi [15]
Northern Ireland Brexit deal: at-a-glance – BBC [16]
What is the new Northern Ireland deal? [Video] – Sky News [17]
Oops! Sunak makes the case for our EU membership in selling new deal [Video] – Via Twitter [18]
UK government made £2.4bn from ‘mortgage prisoners’ claims Martin Lewis – Guardian [19]
[20]Since Brexit, foreign interest in owning UK property has cooled – Klement on Investing [21]
Products and services
Were sub-4% mortgage rates a flash in the pan? – This Is Money [22]
Seven first-time buyer schemes still available after Help to Buy closes – Which [23]
Vanguard to close UK financial planning arm – FT Adviser [24]
Open an account with InvestEngine via our link [25] and get £25 when you invest at least £100 – and an additional £100 if you invest at least £10,000 into an ISA before 2 May (T&Cs apply. Capital at risk) – InvestEngine [25]
Get an interest rate of up to 7% on your cash savings – Guardian [26]
Is your credit card statement as clear as it should be? – Which [27]
Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor [28]
Meet the smart meter addicts – This Is Money [29]
How to save money on books – Be Clever With Your Cash [30]
Homes for sale in foodie hot spots, in pictures – Guardian [31]
Comment and opinion
Why companies are fleeing London’s stock market [Search result] – FT [32]
Do stocks always outperform bonds eventually? – Verdad [33]
The world’s most common forecasting mistake – Klement on Investing [34]
“How did I mess up? I’ve reached 60 with more money than I need to retire” – Humble Dollar [35]
One blogger’s returns from 20 years in residential London property… – FireVLondon [36]
…though rising rates have now sent the UK property market into reverse – Guardian [37]
Frugal or miserly? – Humble Dollar [38]
Keeping investing fees low matters – Dividend Growth Investor [39]
FIRE, Fat FIRE, & Me – FAT’s Substack [40]
‘Generational wealth’ needs a rebrand – This Is The Top [41]
Defending share buybacks mini-special
Buffett on buybacks – Roger Lowenstein [42]
Stop demonizing stock buybacks – The Atlantic via MSN [43]
Naughty corner: Active antics
Why regret and good investing don’t mix – Intrinsic Investing [44]
Neil Woodford’s epic rise and fall [Podcast] – A Long Time In Finance [45]
How you could [have] become an ISA millionaire via investment trusts – This Is Money [46]
Diving into Warren Buffett’s latest letter – Rational Walk [47] and Fully Invested [48]
US risk-free bills yield more than a 60/40 for first time in 20+ years – Bloomberg via Yahoo Finance [49]
Kindle book bargains
Antifragile: Things that Gain from Disorder by Nassim Taleb – £1.99 on Kindle [50]
Bank of Dave by Dave Fishwick – £0.99 on Kindle [51]
Never Go Broke by Lee Boyce and Jesse McClure – £0.99 on Kindle [52]
Green Living Made Easy: Hacks to Save Time and Money by Nancy Birtwhistle – £0.99 on Kindle [53]
Environmental factors
CO2 emissions may be starting to plateau, says IEA – Guardian [54]
Why China keeps building coal power plants – Semafor [55]
Reuters tracked ‘recycled trainers’ to an Indonesian flea market – Reuters [56]
How heat from an Amazon data centre is warming Dublin’s buildings – Reasons to be Cheerful [57]
Greencoat UK Wind full-year results – DIY Investor UK [58]
Off our beat
Do zero interest rates, AI, the gig economy, and FIRE weave a new future? – Not Boring [59]
The unaware snoop – Seth’s Blog [60]
This man went to Disneyland every day for eight years – Guardian [61]
How the Wirecard fraud unraveled [Very long and detailed] – The New Yorker [62]
It’s not case closed on the Covid lab-leak theory – Slate [63]
Ukraine’s Drone Academy is in session – Politico [64]
The tech workers exiled from Europe’s last dictatorship – Rest of World [65]
The luckier you are, the nicer you should be – Morgan Housel [66]
Happiness is a warm coffee – The Atlantic via MSN [67]
And finally…
“Over the course of an investing life, stuff is going to happen – both good and bad – that no one saw coming. Instead of playing the guessing game, focus on the opportunities in front of you. And there are always, in all markets, many opportunities. Yes, always!”
– Chris Mayer, 100 Baggers [68]
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