When it comes to investing, one of your greatest assets may not be the amount of money you start with. It may be time.

Compounding is a simple idea with potentially powerful results. An investment can earn a return. When those earnings remain invested, they may generate returns of their own. Over time, that cycle has the potential to build upon itself.

Think of it like farming. You plant a crop, harvest it, and use part of that income to produce more in the future. Given enough time, what starts small may become something much larger.

Time Matters More Than Perfect Timing

Consider an investor who put $10,000 into an investment tracking the S&P 500 shortly before the 1987 stock market crash. Almost immediately, the investment may have fallen sharply in value. It would have been easy to panic and sell.

But imagine instead that the investor remained invested. During the decades that followed, the market experienced recessions, wars, financial crises, inflation, a pandemic, and numerous corrections. Through it all, a long-term investor continued to participate in the market’s gains as well as declines.

That is an important part of compounding: you must give it time to work.

There is another important piece: dividends. When an investment pays dividends and those dividends are reinvested, they can purchase additional shares. Those shares may then produce future dividends and potential growth of their own. The cycle can continue over many years, even without additional contributions.

Consider another hypothetical example. Assume $250,000 earned a 7% annual return. At that rate, the investment would approximately double in about 10 years. If the same return continued, it could approach $1 million after about 20 years, without additional contributions.

Of course, actual investment returns are not guaranteed or consistent. Taxes, fees, and market fluctuations can affect results. The example simply illustrates why time can play such an important role in building wealth.

The Road Is Never Straight
Long-term investing does not mean ignoring risk.

Markets rise and fall. Investors face risks from inflation, economic conditions, geopolitical events, individual companies, legislation, and other factors. Those risks can be managed, but they cannot be eliminated.

Think of investing as a long road trip. The road isn’t always a straight Kansas highway. There will be hills, sharp turns, construction, and an occasional pothole.

A market downturn can be especially concerning for someone who needs to withdraw money soon. A long-term investor may view the same downturn differently because there may be more time to recover. Lower prices can also present opportunities to purchase investments at reduced prices, although no one knows when a market has reached its bottom.

That’s why an investment strategy should reflect your goals, risk tolerance, and time horizon. Diversification and thoughtful planning can help manage risk, although neither guarantees a profit nor protects against loss.

Give the Next Generation the Gift of Time
Compounding becomes even more meaningful when we think beyond ourselves.

Children and grandchildren possess something money cannot buy: decades of time.

Starting earlier gives money more opportunity to compound. Even modest amounts invested consistently may have the potential to grow when given enough time.

That also makes financial education an important part of a family’s legacy. Teaching the next generation about saving, investing, patience, and risk can provide lessons that may serve them for decades. The size of that first investment may matter less than establishing the habit of putting money to work and giving it time to grow.

This doesn’t mean investors should simply buy something and forget about it. Financial circumstances change. Goals change. Risk tolerance can change. Portfolios should be reviewed periodically to ensure they continue to align with investors’ needs and objectives.

But reacting to every headline or market decline can work against a long-term plan. Successful long-term investing isn’t necessarily about predicting tomorrow’s market or finding the perfect investment. It’s about having a plan, managing risk appropriately, remaining disciplined, and allowing time to do some of the heavy lifting.

So, keep your hands on the wheel and your eyes on the destination. Compounding doesn’t require perfect timing. It requires time, patience, and a plan.

In upcoming issues, we’ll explore dollar-cost averaging and strategies investors may consider as they approach the time when they need to begin drawing income from their investments.

Ben Glaus is a financial advisor and owner of Seed to Sow Financial, LLC. You can call or text Ben directly at 314-492-2383 for any topics you’d like covered in upcoming issues. Ben’s expertise is related to the diversification of farm assets as a means to provide the potential for sustainable growth. His clients are typically seeking investment-related income and wealth preservation.

Registered representative off­ering securities through Cetera Wealth Services LLC, member FINRA/SIPC. Advisory Services off­ered through Cetera Investment Advisers LLC, a registered investment adviser. Cetera is under separate ownership from any other named entity. Registered branch phone: 573-334-8474. Registered branch address: 2855 Independence Street, Cape Girardeau, MO 63703. seedtosowfinancial.com. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.  A diversified portfolio does not assure a profit or protect against loss in a declining market.  Cetera Wealth Services, LLC exclusively provides investment products and services through its representatives. Although Cetera does not provide tax or legal advice, or supervise tax, accounting or legal services, Cetera representatives may offer these services through their independent outside business. This information is not intended as tax or legal advice.  The examples mentioned are hypothetical illustrations for educational purposes only and do not represent the results of any actual client. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. The figures and clients described are entirely fictitious and should not be relied upon as a prediction of future performance.