Time is our greatest ally!

It's been noted that "Time is the exponent that does the heavy lifting. The common denominator of almost all fortunes isn’t returns; it’s endurance and longevity." As we approach the second quarter of the year, and with the tax year end within touching distance, it's crucial not to underestimate the power of compounding and time in achieving investment success.

Compounded returns in investing can wield a profound influence on portfolio growth, yet their potential outcomes often escape notice. Faced with the choice between receiving ￡50,000 annually for 30 years or a penny that doubles in value each year for the same duration, many would opt for the former. This preference stems from our inclination to think linearly—multiplying ￡50,000 by 30 years seemingly results in ￡1.5 million. However, the less intuitive nature of compounding reveals a staggering outcome: the doubling penny would amass a remarkable ￡10.7 million over the same period.

In practical investing, realising significant gains through compounded growth can pose challenges, chiefly because impressive results manifest over extended time frames. Initial gains may seem negligible, with more substantial outcomes materialising only later in the journey. Take the doubling penny, for instance. After a decade, it would merely reach ￡10.24, and even after fifteen years, its value would only amount to ￡327.68. Contrastingly, with the alternative option, one would have amassed ￡750,000 by this point. However, after 27 years, the doubling penny surpasses the ￡1 million mark, culminating in ￡10.7 million after 30 years. Though it's acknowledged that a 100% annual return is unattainable in investing, this example underscores the profound impact of compounding over time—remarkably, all starting from just a penny.

Compounding's potential is further complicated by investor behaviour, which can disrupt the path to achieving these outcomes. Heightened uncertainty and market volatility may tempt investors to react impulsively, potentially derailing long-term investment focus. Familiar counterproductive behaviours, such as attempting to sell before a market downturn or abandoning stocks during such periods, can hinder recovery and impede compounding. In navigating the compounding journey, seemingly counterintuitive behaviours may be necessary.

Nevertheless, it's imperative to remember that uncertainty has always been a constant in the world. Today is no different, with many grappling with increased living costs and rising interest rates, coupled with concerns about global economic conditions and indebtedness. While macroeconomic adversities may momentarily disrupt markets, it's investors' reactions to these events that pose the greatest threat to compounding. Whether facing recessions, financial crises, inflation, or wars, history has demonstrated the resilience of markets over the long term, underscoring the importance of steadfastness in the face of uncertainty.