Compounding, Time and Patience
I’ve just completed reading Atomic Habits written by James Clear and planning to re-read again. This is by far the best self-improvements book I have read. To summarize, it’s about how habits are cultivated from the compounding effect of minuscule actions. I highly recommend this book as the system shared by the author can be easily implemented in our daily lives.
Valley of Disappointment
The book contains many gems in it. One of them is the below quote and chart from Chapter 1 – The Surprising Power of Atomic Habits. You’ll come to understand how it is related to this blog post later.
“We often expect progress to be linear. At the very least, we hope it will come quickly. In reality, the results of our efforts are often delayed. It is not until months or years later that we realize the true value of the previous work we have done. This can result in “valley of disappointment” where people feel discouraged after putting in weeks or months of hard work without experiencing any results. However, this work was not wasted. It was simply being stored. It is not until much later that the full value of previous effort is revealed.“James Clear
Whenever I see a chart with an exponential growth line I’m quickly reminded how compounding affects the return of an investment over time. Before I get into it, take a moment to digest the quote and chart first.
As we can see, the horizontal axis is representing TIME while the vertical axis represents RESULTS. Then there are two sets of lines. The first line “WHAT YOU THINK SHOULD HAPPEN” grows linearly while the second line “WHAT ACTUALLY HAPPENS” grows exponentially over time.
Most of us, including myself used to think progress grows linearly. The problem with this thinking is we tend to quit abruptly whenever we do not notice any significant progress over time. Take my countless time of losing weight experiences. The first month I’ll be full of motivation. Then come the second month with some noticeable positive changes in the body. Finally comes the third month where everything goes into a plateau state with little or without any weight loss.
Since I believed progress must be linear, I’ll be easily demotivated whenever I don’t see much progress. The chances of me quitting are at the extreme high at this point of time. This is the “valley of disappointment” explained by James Clear. All the hard work done for the past 3 months goes to waste without realizing compounding requires time before achieving the desired result. With that understanding let’s switch our attention to investment return.
Investment Return vs Our Expectation
The chart above is similar to the James Clear “valley of disappointment” chart. There are two lines, the blue line represents the 10% annualized return exponential growth while the red line represents “Our Expectations” linear growth. You would have noticed, the investment return for the first 14 years was below our desired expectations. Allow this information to sink in for a moment. Imagine how disappointed and anxious you would have been during these initial years.
Long Term Investing
When it comes to long term investing, this is the toughest phase. It takes years before the investment stabilizes and start compounding. Years!!! To make matter worse, there will be times when the investment return goes into the red territory. Since the beginning of this year, my own retirement investment return has shrunk from around RM18k to RM4k.
I’m only human. I can’t pretend I’m cool and unaffected by it but every time I feel like cutting my losses, I’ll remind myself the following. This is the nature of the stock market. With high return comes high risk. In the short term, it is volatile and risky. However, in the long term, stocks become less risky as they need time to compound. Moreover, this investment is for my retirement. There is easily another 20 years for it to grow. Should I be affected by current events while my investment objective is for the future? Let the power of compounding, time and patience be my ally.
I’ll end this post with the below tweets as a reminder for myself and for you too. Hope you find it useful.
A part-time Malaysian blogger writing his thoughts online. Interest in both personal finance and economics, mainly the behavior aspect of them. I consider myself Poyo since I do not have any significant credentials in both fields, so readers beware. Thanks for reading.