In a previous blog post and white paper, the first key mathematical principle we discuss is taking advantage of compounding returns. While we previously explored the topic from a theoretical, academic standpoint, the analysis of the bull market provides insight to the power of compounding in a real-world scenario.
For example, let’s assume a $100,000 initial account value: one right when the bull market started and the other a single month later.
Source: Morningstar Direct, Swan Global Investments
By capitalizing on that first month “pop” of 26.9%, the account value increased by $26,890. That additional $26,890 went on to compound by another 243.4% over the next eight years and five months. The “latecomer” approach was at an immediate deficit from which it never recovered.
This is the power of compounding returns in action.
To take full advantage of long bull markets, one must be invested before it even begins. But what is the best way to achieve this? One can attempt to time the market bottoms and tops or remain in the market at all times.