We all know that investments grow exponentially over time. Similar to if you were to roll a snowball, you start with a tiny mound of snow and keep rolling it to grow it bigger and bigger. Investments are similar – as the investment value grows each year, every percent you gain will represent a larger starting amount the following year. However, the real question is, when do we really start to see these investments blow up?
Investments are always snowballing to some extent – however, the longer you keep your money invested, the more prominent this effect will become. If you had £10,000 invested for 50 years – with an average return of 5%, your first year’s return would be £500. However, by the 50th year, your investment value will be £120,000. At a 5% return, that would give you £6,000 for that year! See how it snowballed?
Seeing this 5% return of £500 turn into £6,000 seems pretty cool right? Well, there are a few more ways that can get your investments snowballing faster than ever!
What else helps my investments snowball faster?
In short – dividends. Regardless of whatever you’re invested in, you will receive some sort of income in exchange for remaining invested.
For companies, they pay out dividends to all shareholders and for bonds, they pay out interest at the bond’s coupon rate.
A quick tip from me here is that you should aim to invest in funds that are ‘accumulation’, rather than ‘income’. Usually, you get funds that have a variation of each – however, the only difference is, any income paid out to you will be automatically reinvested to boost this snowball effect along.
‘Income’ investments pay you out the cash directly rather than reinvesting it for you. This is only ideal if you want to take that income and invest it into something completely different. With a full-time job, kids, and hobbies on the side, the last thing you want to be doing is checking when dividends are going to be paid out and setting yourself a calendar reminder to reinvest the dividends (even then you might not hit the minimum investment limit!).
So do yourself a major favour and get your dividends automatically reinvested.
The best amount of time to stay invested
As we’ve mentioned – staying invested longer will give you that snowball effect that everyone wants from their investment. But what is the optimal time to keep an investment?
Unfortunately – as with everything, it depends. It depends on a few factors:
- What is your investment horizon? I.e. when do you want to take the money out;
- How much money have you got invested?;
- How much money are you contributing on a regular basis?; and
- How strong is your stomach?…
Investment Horizon
How does your investment horizon impact your optimal time to be invested for? Well, the answer is pretty simple – it’s the time that best suits you. Seems like a bit of a ‘cop out’ but I would determine the best investments that suit your required horizon.
Doing some solid research and picking your investments from a small-cap market like the AIM, you can capture some serious gains very quickly. This will induce this ‘snowball effect’ quicker than investments that only gain around the 5% return mark per year.
Amount invested
This is going to not only determine what investments you’d want to choose but also the extent that you’ll achieve this glorious snowball effect.
Going back to our example of a £10,000 investment – putting it into something that produces a 5% return is only going to give you £500 a year. Not really something I’d rely on for retirement. In this case, you’d want to put it into something high-risk and volatile (this is not me saying to do so – do it at your own peril but just DO YOUR RESEARCH) as these can bear high rewards.
On the flip side, an investment of £500,000 at a return of 5%, you’ll see your investment snowball very quickly because 5% of a lot of money is still going to be… well… a substantial amount of money.
Regular contributions
Contributing to investments regularly is a great idea for a few reasons. Mainly, the more you add to your investments, the more you will see from your, say, 5% return. An additional benefit for contributing to your investments regularly is that you will benefit from something called Dollar Cost Averaging (DCA). If you want to learn more about DCA, I’ve got a great article called ‘How Often To Invest In An Index Fund’ – doesn’t sound relevant here but there are heaps about DCA so definitely go check that out.
Anyway – the premise is, contributing to investments regularly will essentially bring the average cost of your investments to a reasonable level and stop you from buying into a market that is too high.
For the purposes of our discussion on the best way to maximise our snowball effect – regular contributions will help get those smaller returns growing into retirement-worthy returns in no time.
Have you got the guts?
Sounds a bit silly but have you got the guts to wait it out until the point your investments start to really take off?
Investments, in the short term, can be extremely volatile – it only takes some shaky politics to get the stock markets jumping up and down like crazy. So what do you do when you check your investments and see that it’s now down 20%?
Holy crap, I need to sell before I lose anymore!… right?
Definitely not. If you’ve done all of the research and you’re confident that the cause of the drop is nothing to do with your investment, why would you sell it? Just because everyone else has started panicking?
Hell no! You need to buckle up and enjoy the ride. If anything, I’d buy even more into my investment because it’s an absolute bargain at the moment!
If you have a serious look in the mirror and promise yourself that you won’t jump ship when times are rough – you might just make it to the other side and watch those investments rocket.
I just want to preface this with the importance of solid research. Always look at why your investments drop significantly. If it’s because the business is in financial turmoil – jump ship and cut your losses. If it’s just because Elon Musk said he wasn’t a fan – enjoy watching the shares drop and pick up those beautiful bargains.