An important message from Vanguard’s F. William McNabb III:
The power of compounding can put time on your side
The purpose of my annual letter to you is, of course, to report on how your fund fared over the past year. But while it’s important to be aware of how your fund is doing in the latest market environment, short-term performance isn’t what matters most.
The focus on the preceding 12 months shouldn’t distract investors from the long-term commitment they need to help themselves be successful.
To be sure, there are many aspects of investing success that you can’t influence, overall market performance being the obvious example. But you can control how long you invest, and that’s important because it allows you to harness the power of compounding—the snowball effect that occurs when your earnings generate even more earnings. As Benjamin Franklin said, “Money makes money.”
A simple example illustrates the benefits of compounding that can potentially result from investing and then reinvesting your money over the long haul, putting time on your side. Suppose that you were able to put away $10,000 and earn 6% a year (keep in mind that this is hypothetical, and that actual returns would likely be different and a lot less predictable).
If you keep reinvesting the earnings (again, assuming a hypothetical return of 6% each year), after 10 years your investment will have grown to just under $18,000. But if you were able to invest that $10,000 for 30 years, your investment would grow to more than $57,000.
Compounding can make a real difference in your account balance over time, particularly when combined with Vanguard’s low expense ratios—which allow you to keep more of the return on your investment.
As always, thank you for entrusting your assets to Vanguard.
F. William McNabb III
Chairman and Chief Executive Officer
December 19, 2013