The Stoic Path to Wealth by Darius Foroux

Author:Darius Foroux [Foroux, Darius]
Language: eng
Format: epub
Publisher: Penguin Publishing Group
Published: 2024-07-16T00:00:00+00:00

Tips for Compounding Money in the Market

If I presented you with the following two options, which one would you choose? Option one: You devote all your free time to obsessing about investing and actively attempting to outperform the market. Let’s assume you manage to achieve 2 percent better returns than the market average. However, in exchange for this, you sacrifice all your free time—no time for exercise, no date nights, and no attending your children’s recitals. Option two: You adopt a passive investment strategy, allowing your money to grow as the market goes up. You benefit from the power of compounding while enjoying your free time and peace of mind.

Unless you’re a finance professional or you’re passionate about beating the market, it’s likely you chose option two, because it gives you the best of both worlds. You get to build wealth and you can spend your time on the things you truly love.

The good thing about compounding is that it doesn’t require you to do anything. Simply invest money, achieve a return, then keep investing so you can generate earnings on top of your previously achieved earnings.

When you consistently reinvest your returns and let your money compound, the growth eventually reaches a point where it becomes exponential, resembling the shape of a hockey stick. In the beginning, the progress may seem slow and steady, similar to the straight handle of the hockey stick. However, as the compounding effect takes hold over time, the growth rate accelerates dramatically, like the sharp upward curve of the hockey stick’s blade.

While the idea is simple, the execution is one of the hardest things in life. This is because the flat period of the hockey stick generally lasts two decades when it comes to wealth building, and because humans are short-term oriented, we tend to stop investing before we reach the exponential-growth stage of compounding. To avoid that, adopt the mindset of a long-term investor and say to yourself: I’d rather use my returns when they are big in the future than take out small amounts of money now.

When you invest and allow your money to compound, you are truly improving your future. The idea of taking time now to prepare for the future is an essential aspect of Stoicism. Seneca said it best: “Everyone approaches with more courage a hazard for which he has long squared himself, and resists even harsh circumstances by contemplating them in advance. But the man without preparations panics at even the lightest troubles.”

To build long-term wealth, we must adopt the same mindset. We face the future with poise because we’re investing today. What follows are three tips that will help you to make maximum use of the power of compounding. When you live by these principles, you will let your money grow on its own.

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