What Happens When Your Investment Plans Work?

Image: Geralt, Pixabay.

In the financial media it's common to run across articles offering investing advice or warning of things that can go wrong. It's not too common, though, to read about what happens when things go right. After all, many of us have made investment plans as we prepare for retirement, and if we've been sensible and disciplined, these investment plans often work! Here's what to expect as you carry out a successful investment plan.

It's not entirely an academic exercise, either, as many subscribe to the value of visualization for success. Athletes have long used visualization in their training and preparation. Golfing giant Jack Nicklaus has reportedly said, "I never hit a shot, not even in practice, without having a very sharp in-focus picture of it in my head." Thus, you might want to try sitting still now and then, and visualize what your financial future will look like at points along the way to retirement.

Many times, good plans work out well.

Failures and successes
Your investment plan is likely to play out over decades. At least, ideally, it will. You might sock away small sums in your 30s or 40s, then larger amounts in your 50s and beyond. One thing you'll experience -- repeatedly -- is extreme volatility, market crashes, and market rebounds. It is generally estimated that the stock market will drop by 30% or more once or twice per decade. Ideally, you'll learn to expect that and not panic, as those who sell following a market drop often underperform those who hold firm. Successful long-term investors have learned to not be driven by emotions such as greed and fear.

You'll also learn to expect to lose money due to regrettable investing moves. It's inevitable, and even the greatest investors make occasional blunders. The difference between you and a new investor, though, is that over time you'll learn from your mistakes and will tend to make fewer of them. You won't kick yourself too hard over dumb moves, either, because you'll have noticed that your smart moves have more than made up for your dumb decisions. Remember, after all, that you can lose up to 100% in a stock (and you'll usually be able to bail well before that), but you can gain 100%, 200%, 3,000%, or even more in one.

Lessons learned
You will also learn lessons from others' mistakes and others' writings. By reading widely, you can learn from the best investors. Peter Lynch, for example, has exhorted investors to "know what you own, and know why you own it." You will have come to appreciate sustainable competitive advantages in companies, such as Facebook's massive social network, which it can leverage for video advertising and other profit-generating initiatives. Apple, meanwhile, benefits from a strong brand and switching costs, which attract and retain new customers, as they get enmeshed in the iOS world of phones, music, apps, and devices that integrate seamlessly with each other.

You will have learned to be patient, too, heeding the words of folks such as legendary trader Jesse Livermore, who said, "The big money is not in the buying or the selling, but in the sitting," and Warren Buffett, who said, "Our favorite holding period is forever."

You might even have learned that you don't have the time, skills, or interest to choose stocks on your own, and you might have opted to invest in broad-market index funds. There's absolutely nothing wrong with that, and as the stock market has averaged annual gains of close to 10% over many decades, you can still do very well. As index fund pioneer John Bogle quipped, "Don't look for the needle in the haystack. Just buy the haystack!"

After some years, money can start growing like crazy.

Crazy math
Here's the really fun part of what happens when your investment plans work: your money grows. And as the years go by, it does so in a spectacular fashion, thanks to the magic of compounding. Think of it this way: When you only had $10,000 in your investment account, if it grew by 10% over a year, you'd gain $1,000, not an unwelcome sum. But once you hit $100,000 in your account, a 10% gain would amount to $10,000. Once your portfolio was worth $750,000, a 10% gain would mean an additional $75,000 -- perhaps more than your salary at the time. Check out how a $10,000 nest egg grows over decades at 10%, on average, annually:

Notice how the longer you let your money grow, the more rapidly it grows. And all that is without any extra dollars being invested. You'll naturally have added money along the way, which can build a million-dollar portfolio in far fewer years. Of course, all this growth won't happen in a straight line. There will be down years, but more up years. In some years you'll enjoy a gain of 20% or even 30%, and eventually your portfolio will be well into six-digits and you'll be enjoying frequent five-digit gains.

You'll experience other thrills and delights as you become wealthier over time. Basically, this is all a pretty picture to aim for, and it's one you can attain with some discipline and patience.