Albert Einstein is said to have called compound interest “the most powerful force in the universe.” Because I’m not nearly as smart as Mr. Einstein nor do I have the luxury time to test his theory, I’m inclined to believe him. My goal in chasing solid returns is to utilize the power of compounded interest by seeking different (high-return) investment ideas.
There are two key that everyone must understand when considering investments.. risk and time.
Investment Returns = Time + Risk
Everyone should understand that investment returns are inversely proportional to the risk of the investment.. meaning that the higher your returns are the higher risk your investment is (in most cases).
Everyone should also understand the time effect on returns. For instance, if you purchased a house in 1990 for $100,000 and you sold it 10 years later for $180,000 well you made a cool $80,000 and 80% on your money. That’s great, however, your annual return on your money is only 6.05%! And that’s if you paid cash and no fees have been included. In the same time period the S&P 500 index returned about 13% annually. More on this later, back to time and risk..
Given this, I tend to favor investments that have higher returns per my time invested. For instance, if I were to invest in rental property, I would prefer to invest in a REIT that returns 12% rather than buying my own rental and becoming a landlord and earning a 15% return. I value my time as I believe everyone should. Even going to work you make a certain wage per hour, week, day, year, etc. Thus, your job is an investment that pays a certain return and has a certain amount of risk. So again, my goal is to capitalize on the power of compounded interest by getting the highest returns possible, with the shortest time frame possible, and the lowest risk possible.