Money 101 · Guide 4 of 9 · 7 min read
You are probably not going to out-trade Wall Street. But you have something Wall Street cannot buy: decades.
Picture a snowball at the top of a hill. At first it is tiny. By the bottom it is huge, and most of that size came from the last stretch. Compounding works the same way: your investment earns returns, then those returns earn returns of their own. Most of the growth happens late, which is why time is the secret ingredient.
Prices rise over time, which is called inflation. At a hypothetical 3% a year, something that costs $100 today costs about $134 in ten years. Flip it around: $100 sitting in cash buys only about $74 worth of stuff in ten years, and about $41 worth in thirty. Cash is great for emergencies and near-term goals. For goals decades away, many people choose to invest so their money can grow faster than prices.
Nobody reliably knows when markets will rise or fall, not even professionals. The days with the biggest gains often come right next to the scariest days, and investors who jump out to "wait for safety" often miss them. The simple alternative is to invest on a regular schedule and leave it alone. Investing a fixed amount every month is called dollar-cost averaging.
Markets do fall, sometimes hard. In 2008 U.S. stocks lost roughly half their value over about a year and a half, and it took years to recover. In early 2020 they fell about a third in a matter of weeks, then recovered within months. Past results do not guarantee the future, and there have been long stretches of poor returns. That is why this approach is for money you will not need for many years, and why an emergency fund comes first.
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