How To Invest Long Term, With Compound Interest

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Investing can be difficult, but it can also be quite easy and rewarding if you use the right methods. If you have been a reader of my previous articles, then you would know that the investment method that I love is long-term investing combined with compound interest. The reason for this is because it is simply the absolute best and most effective way to invest, especially when it comes to the stock market. And if you say otherwise then I won’t believe you. So, in this article I will write about long-term investing combined with compound interest. 

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Basics of compound investing/long-term investing 

For those of you who don’t know, long term investing is investing over the long term (Usually over 1 year). And compound investing is a strategy where you invest consistently over a longer period to multiply/Compound the investment. (Just for the math heads out there, the formula is A = P(1 + r/n)nt )  


An example would be investing in the S&P 500 every month for 20-30 years. Now, this would look something like this: Start up investment 1000$, monthly investment 500$ in the S&P 500 (Which gives you an average return of 9% annually), then the first year you would have around 80,000$. And in year 10 you would have around 1,000,000$. And in year 20 you would have somewhat around 3.3 million dollars, but the funny thing is if you keep investing in the same way for another 10 years, your money will end up at 8,840,613.99$. So, after 30 years if you had only kept it in the bank then you would have around 1.8 million dollars. But if you had invested it by using compound interest that 1.8 million would rather be 8.8 million. 


Now, this is an investing method every investor should have as a part of their portfolio, you are can obviously put all your efforts into this strategy, but if you have read The Portfolio Every Investor Should Have, then you would know that to be more successful with your portfolio you need to stay diversified. But the main thing is that this strategy is extremely powerful, and it should be used in every aspect of long-term investing. I don’t really care what you invest in, but if you want to get a decent return then you would be wise to use the compound investing strategy. But again, the investment you make does play a part in this equation. You would usually want to choose index funds or ETF’s that tracks the major markets. But you could also go for stocks, and if you do then I would recommend solid blue-chip stocks that pay dividends (Just remember that if you go for stocks then you would expose yourself to much more risk, because your investment won’t be diversified). 


Either way I would recommend index funds that have low fees or ETFs, and the type of index funds and ETFs should be those who track the major markets in the world. You should at least go for something that tracks the US market, preferably the S&P 500, one that tracks Developed (foreign) Markets, Index US REIT Index (Real estate) or Emerging Markets Stock Index. Either way you should always do your research before investing. 

(If you want a good article on how to structure your portfolio, then check out one of mye earlier articles: The Portfolio Every Investor Should Have)



Now, one of the most common strategies when it comes to compound interest is just investing consistently in funds, usually index funds. There is nothing wrong with this strategy, but to be honest, it’s boring and relatively slow. So, if you are investing just because you want to put your money somewhere where it can grow and compound without you looking at it, then this strategy is excellent.  

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But, if you are young, interested in investing and willing to take some risk, then dividing the compound strategy between both index funds and stocks who pay dividend would be better. An example of how this would look like would be:  


50% in Index funds, around 3-5 solid funds who track major markets in the world. And 50% in Solid blue-chip stocks who pays dividends, around 5-15 different companies. And from there consistently invest every month into these assets. And reinvest the dividends you get to maximize the compound effect. 


Now, of course you diversify how much you invest in each category based on what your financial goals are, and how much risk you are willing to take. If you are young and willing to take a lot of risk then you should lean more towards stocks, because with stocks you take a lot of risk, but you also have a much greater chance of a better return. And if you are not willing to take so much risk, then you should lean much more towards index funds, and if you want to be even more risk free, then you should replace stocks with bonds and divide between index funds and bonds.  


The main message is that you can play around with this strategy if you stay diversified on some level that fits your financial goals, and you consistently invest to maximize the effect which your investment will compound. And of course, the investment itself must be solid, but I trust you to do the research needed to find that investment.  

 

Long term investing is excellent, especially when you use compound interest to its maximum effect. And of course, this is an investment strategy every investor should have as a part of their portfolio. But it shouldn’t be the main focus, we must remember that investing does not make you rich, it makes you wealthy, and the way you get rich is by your career or profession. This strategy is simply to compound the money you already have and will make. So, this strategy allows you to focus more on your career while your money compounds, that is why everyone who uses this strategy should set up automatic payments into the investment every month so that you have more time to focus on your profession while your money compounds. 


Before you leave, If you are looking for a book to educate yourself on Investing than I would suggest, The Intelligent Investor by Benjamin Graham. The reason I would suggest this book is because the book offers sound advice on investing from a trustworthy source – Benjamin Graham, an experienced investor who flourished after the financial crash of 1929. Having learned from his own mistakes, the author lays out exactly what it takes to become a successful investor in any environment.  


Thank you for reading.