When it comes to investing, time is your friend.
To illustrate that point, AMP chief economist Shane Oliver has extrapolated the investment returns from a single dollar invested in 1900 across three asset classes: shares, bonds and cash.
The results show that if you’d celebrated the looming federation of Australia in 1901 by purchasing a bond or putting the money in the bank, then you booked modest gains over the last 118 years (statistically, your investment grew by either 23,400% in cash or 86,600% in bonds).
But our proverbial supercentenarian investor would be sitting in the rocking chair lamenting those performances compared to shares.
Oliver’s chart tells the story:
Not bad, huh?
If a young Sydney chimney-sweep was lucky enough to find 10 shillings (aka $1 when we converted to decimal currency in 1966) at the turn of last century and wandered down Martin Place to invest it on the local stock exchange, their investment would now be worth well over $500,000.
As you may have noticed, Oliver’s chart doesn’t include the cumulative returns on one of Australia’s core asset classes: residential property.
But he said the principle of compounding returns applies to property the same it does to shares over the long-term.
“A growth asset like property is similar to shares over long periods in this regard. Short-term share returns bounce all over the place and they can go through lengthy bear markets,” Oliver said.
The sideways arrows along the red line for share market returns in Oliver’s chart represent bear markets.
“But the longer the time period you allow to build your savings the easier it is to look through short-term market fluctuations, and the greater the time the compounding of higher returns from growth assets has to build on itself.”
Rather than suggesting some magic way to build wealth, Oliver said the best way to build wealth by saving more than you spend and investing the gains as early as you can.