If I gained 1,000% on a £1,000 investment I’d end up with £11,000.
And that may seem like a tough goal to reach. However, the mathematics of the situation means achieving a 1,000% return may not be as difficult as it at first seems.
The power of compounding
I believe that because of the power of the process of compounding. For example, achieving a 100% return would give me £2,000. But if I then repeat the trick and achieve another 100% return on top of what’s gone before, I’d end up with £4,000. And that’s a 300% return over all.
Can you see where this is going? If I achieve one more 100% doubling of my money, the overall sum would be £8,000, and that’s a 700% return over all.
So, compounding means the longer I do it with positive returns, the more the absolute returns accelerate higher. And that’s one of the big secrets of Warren Buffett’s extraordinary returns, for example. In the later years of a period of compounding, the gains can be spectacular.
I’m not pretending it’s easy to gain consecutive 100% returns from stocks. But one of the most important things is to make sure returns are actually positive and that I don’t slip into losing money on stocks. Buffett himself emphasised the importance of not losing with his famous first rule of money management — don’t lose money. And he backed that up with his second rule — never forget rule number one.
Risk-first investing
And I’ve heard it said that the most successful investors are those that approach the process of investing risk first, or defensively. By focusing on protecting the downside risk, the upside almost takes care of itself. The alternative is to shoot for big gains all the time, which often leads to investors coming a cropper and underperforming.
So, my plan to achieve a 1,000% gain on a £1,000 investment would involve taking it slowly but surely. I’d spread my money over several index tracker funds such as those following the FTSE 100, FTSE 250 and small-cap indices. and I’d also invest in trackers following foreign markets such as America’s S&P 500 index and others.
But one of the keys to the plan would be the automatic reinvestment of dividends along the way. So, I’d select the accumulation version of each fund and then sleep well at night knowing I’d done the best I could to make sure compounding is under way in my portfolio.
However, I wouldn’t stop there. One of the key variables in any plan for compounding money is the level of the annualised rate of return. So, I’d aim for higher annualised returns by targeting the shares of individual companies as my portfolio grows in value. All shares carry risks. And such an approach will require more research and monitoring time. But, I think it’s worth the effort for my portfolio.