If your investment horizon is between 1 and 2 years than a couple percent really doesn’t matter. Your portfolio won’t be affected in any meaningfully way. However, if you are a long term investor 1 or 2% certainly does matter and will have a huge impact on your total portfolio return. I created the below chart to illustrates just how much difference 1 or 2 percent can make. The chart makes the following assumptions:
1. Initial investment of $10,000 in year 1.
2. No additional contributions.
3. Interest compounded annually.
4. All interest is reinvested.
So although it may seem petty to be wasting time and squabbling over a one or two percent difference it could mean a difference of hundreds of thousands of dollars in retirement.
3 comments:
I find it interesting how mysterious most people find this issue. It should be reasonably self-evident that if you gain 1% a year for 45 years, you'll gain about 1% × 45 = 45% total. Compounding only makes the total even higher.
Good article. I've got a post that will be published Thursday @ 9am pointing to it and relating it to The Little Book of Common Sense Investing. Good stuff!
http://www.frankvoisin.com/
Good article but I think the math in your table is wrong.
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