10 Habits of Wealthy and Comfortable people - Habit 5 | Knox & Wantirna

March 13, 2017

One of the greatest factors to create wealth is  the 'Compound Effect'. A key component of compound is time. You may have heard of the saying "its not timing the market, its time in the market" To fully benefit from compound it is critical to retain your asset.
So what exactly is compound?
If you had an asset of $100 and the asset went up 5% in value in year one then the asset value becomes $105. In year two the asset again increased in value by 5% but this time the increase is 5% on $105 which means the asset value is now $110.25. So as time goes by the asset will hopefully continue to increase in value.
A great example of compounding working in real time is a birthday present I gave my eldest daughter when she turned 18. We purchased 50 ANZ shares  for $20.00 at a total cost of $1,000 (plus $19.95 brokerage). Every six months we receive a dividend from ANZ, but rather than take the income which she didn't need she elected to reinvest the dividend into more shares with ANZ (this is known as a Dividend Reinvestment Plan - DRP).  Six years on she now has 71 shares valued at $31.89 with a total value of $2,264. My daughter now receives dividends on 71 shares hence the compound effect is in full swing.
I would expect my daughter will only sell this asset should a considerably better opportunity present itself. This is a perfect example of a 'bottom draw asset' ie purchase the asset, place it in the bottom draw of the cupboard then let it compound away.....just like a fine wine.
In my thirty odd years working with wealthy and comfortable clients one of the most common denominators for the successful  is that they accumulated assets, not traded assets. The really smart clients then had a strategy to fast track the compound effect. They would leverage off the asset base they had created which provided a further asset base, and generally an income producing asset. Leveraging for benefit is topic for Habit #6 which we will post shortly. 
There are times in our lives that selling assets will provide a short term cure to an issue. This might be a tight cashflow , illness, job loss or to pay for a lifestyle purchase. Despite the attractiveness of 'cashing in' you are generally best served by retaining. However from time to time we will make a poor Investment decision which may necessitate selling and redirecting the funds elsewhere. It is also important we don't become emotionally attached to our Investments so finding the balance is critical to an ongoing strategy.
Compound is King. 


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