Hard Lesson About Compounding – Could Have Been Better with Coke
This post was originally published here.
As an excited 17-year-old who had saved up a little more than US$2,000, I wanted to buy some stock. I held small amounts of two other stocks at the time, so I purchased Coca-Cola shares with the money I had saved.
Ignorance is not bliss when missing big future interest
I don’t know what I was thinking when I sold the Coke shares around six months later, ignorant of the importance of “buy and hold” investing and the magic of compounding interest. I lacked any education about the market and would have to learn as an adult about compound interest and “buy and hold” or “passive” investing.
Could have made 4,000%+ with investing know-how
It was a major error to sell the shares. Using a compounding calculator, that US$2,100 would be worth US$99,880 today. As another illustration, in 2012 Coca-Cola reported that just one if its $40 shares purchased in 1919 (with dividends reinvested, meaning compound interest comes into play) would be worth US$9.8 million today.
Ignoring compounding means broader portfolio loss
At the time, if I had known about the power of dividends and compounding them back to reap interest, I would have amassed a decent-sized portfolio a lot sooner, which means more time over my lifetime for compound interest to work its magic.
I recommend that all “newbies” read the top books on investing, as well as more simple sources, such as Kiplinger’s Personal Finance, and Money magazines, to educate themselves.
Andrew’s takeaways – Avoid these mistakes to become a better investor
Not investing can be as big a mistake as investing
Probably the most valuable lesson in investing is to stay invested over a long period. Give the compounding effect time to work in your favor. Most people get this wrong. They fail to realize that the benefits of compounding start to accrue only after 20 years. Very few people see their time horizon in decades; most see it in days.
The importance of education
Most young people are not taught the principles of compound interest and therefore never take advantage of it. Our society would be much better off if we just invested $10,000 into a passive fund at the birth of every child. At 8% per year, this would grow to be $1,000,000 by the time they are 60 years old. Kids around the world would be millionaires upon retirement. Unfortunately, very few people have that foresight. If you don’t read this, you could end up living “in a van down by the river”.
Mistakes in this story
1. Failed to do their own research
- Inadequately researched type of investment
2. Failed to properly assess and manage risk
- Had no exit strategy for when things went wrong
- Failed to set a stop-loss and follow it
3. Driven by emotion or flawed thinking
- Failed to invest in a familiar, good idea
Learn about the six ways you will lose your money and how to avoid them here.
DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article.