You Can Make You Rich by Sean Dillon

Author:Sean Dillon
Language: eng
Format: epub
Tags: rich, invest, money, investment, wealth, index funds, ETF, FTSE, stocks, shares, profit, increase
ISBN: 9781907290220
Publisher: Andrews UK Limited 2010
Published: 2010-08-01T00:00:00+00:00

Patience

‘Patience is the greatest of all the virtues’ (Cato the Elder, 234-149BC).

How many times have you seen an article showing you the track record of some stock and explaining that if you had bought so much on such a date and held it for so many years you would be worth some fantastic figure by now? However true this may be, the fact remains that most people in the market can’t do this. They are unable to hold long-term positions.

What those articles are actually proving is that the really big gains come from waiting.Butwe are constantly being encouraged to trade. The market goes up and we are told to ‘book’ profits before it goes down again; the market declines and we are told to get out while we can. Can you see the influences that are working against you? You must guard against the human tendency to have to act.

Not having patience means that you are constantly interrupting the greatest wealth generating tool available to you. That tool is compound interest. Compound interest is when you add interest back to capital and thereafter earn interest on the greater amount. Effectively you are earning interest on interest. Naturally, it is easy to see that, the longer you allow this process to work, the better.

Selling stocks and paying taxes on a regular basis interferes with this and hurts performance. The following example helps to explain why. Let’s say that you buy an asset that compounds at 15% per year and you leave it to grow for thirty years. Then you sell and pay a one time capital gains tax of 35%. It works out that you earned 13.3% per year.Now let’s say that you bought the same asset but sold it every year paying 35% tax on the 15% gain. Instead of earning 13.3% you would earn 9.75%. That’s a difference of more than 3.5%. Over thirty years that adds up to a lot of money! So you see that the fact you are not trading and selling means you are earning for doing nothing! It was Einstein who described compound interest as the eighth wonder of the world. Never interrupt it without good reason!

Having most of our money in an index gives us the patience to let compound interest perform its magic for us because, for one thing, we are not concerned about individual companies. We are not making buy and sell judgements based on whatever is the latest thing to worry about. Remember that the big money is not in the buying or the selling; it is in the waiting.

We want to put our money where we don’t have to make another decision. Unless you are extremely confident in individual stock selection it makes sense to buy a low cost index tracker. But now that we’ve touched on it, let’s have a look in the next chapter at how we might improve our overall performance.

Chapter 10

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