top of page
  • Writer's pictureRealFacts Editorial Team

The Power of Compound Interest in Long-Term Investing

A graph

David Saito-Chung, Investors Business Daily (IBD) author, recently highlighted the effectiveness of long-term investing strategies and the importance of staying in the market despite periodic corrections. He discussed insights from Phil Pecsok, a managing partner at Anacapa Advisors in Los Angeles which manages over $50 million in assets. Pecsok cautioned against actively managing a stock portfolio with a neutral stance. Rather he advocates for investing in leading companies and maintaining a long-term approach. David Saito-Chung wrote, “The average return of long-short funds was a total 12% over the past five years. How about the "market neutral" class of actively managed funds? It earned the same, a paltry 12%. In contrast, since the end of March 2018, despite three separate stock market corrections of 20% or more by the S&P 500, the large-cap benchmark has nearly doubled from 2640 to 5022, up 90% excluding dividends.” These facts underscore the significant returns that can be achieved by staying invested in large companies over the long term.

Aligned with this data, Alissa Coram, an IBD Reporter, recently shared a concise video segment advocating for the benefits of dollar cost averaging into broad market mutual funds over active investing strategies. Dollar cost averaging is a strategy where an investor regularly buys a fixed dollar amount of a particular investment, regardless of its price. This approach helps to smooth out the impact of market volatility over time. This strategy of dollar cost averaging can be particularly effective because of the power of compounding gains.

Compounding occurs when your investment returns generate additional earnings, which are then reinvested to increase your overall investment. This process accelerates over time, leading to a significant accumulation of wealth, especially when allowed to grow over longer periods.

Coram stated that there is no right or wrong time to start investing in mutual funds or ETFs, which generally have lower expenses than mutual funds. The longer the investment timeline, the greater the potential for investors to benefit from the powerful effects of compounding gains. Coram referenced the period from 2005 to 2015 as a prime example, highlighting that during this time “the S&P 500 gained 7.3% on average, but for the typical US shareholder who tried to get in and out of the market when different conditions arose. They only averaged a gain of about 4.2%.” She drew on the fact that many active investors end up buying too high and selling too low, often missing out on some of the largest market days that frequently occur during bear markets. There are a few important principles to remember as investors take this route. Bill O'Neill, IBD founder, has often warned against being swayed by market news, short-term thinking, excessive focus on fees, and succumbing to fear during market downturns when aiming for long-term investment success. Patience is required and trust that over time the power of compounding will gradually lead to the expected gains.

0 views0 comments


bottom of page