Jim Cramer: How compounding can help you double your money in 7 years
Summary
TLDRIn this Mad Money episode, host Jim Cramer emphasizes the importance of investing in the stock market for wealth creation, highlighting the power of compound interest and long-term gains. He discusses the significance of generational investing, advocating for a balanced portfolio that includes both diversified index funds for capital preservation and individual stocks for potential higher returns. Cramer also addresses concerns about market volatility and the historical performance of the S&P 500, encouraging viewers to invest early and benefit from the magic of compounding.
Takeaways
- 💼 The primary mission is to help viewers make money and level the investment playing field.
- 📈 The speaker believes the stock market is the best tool for social mobility and wealth creation in the U.S.
- 🚀 Emphasizes the importance of investing early and consistently for long-term wealth growth through the stock market.
- 📊 Historical data suggests that the S&P 500 has an average annual return, including dividends, of about 10% from 1928 to 2014.
- 💡 The concept of compound interest is highlighted as crucial for wealth accumulation over time.
- 💰 For young investors, starting early allows for significant wealth growth due to the power of compounding over a longer period.
- 🏦 The speaker recommends a two-portfolio strategy: one for capital preservation in index funds and another for more aggressive individual stock picking.
- 📝 Valuing a company involves assessing its future earnings stream, which can guide investment decisions.
- 🚫 Warns against putting the bulk of one's portfolio in individual stocks due to the high risk involved.
- 📝 Discusses the importance of dividends for capital preservation and capital gains for appreciation.
- 📱 Invites viewers to engage with the show through various communication channels for questions and interaction.
Q & A
What is the primary mission of the speaker in the video?
-The speaker's primary mission is to help viewers make money, level the playing field for all investors, and educate them on how to build and preserve their wealth.
Why does the speaker believe the stock market is the best ladder for social mobility in the country?
-The speaker believes the stock market is the best ladder for social mobility because it offers a way to become wealthy even without being born into wealth, if one can save and invest wisely over time.
What is the historical perspective given on the stock market's performance?
-The historical perspective given is that from 1928, just before the Great Depression, through the end of 2014, the average annual return for the S&P 500, including dividends, is about 10 percent.
What is the significance of compound interest in wealth creation according to the speaker?
-Compound interest is significant in wealth creation because it allows the earnings from investments to be reinvested, thereby growing at an increasing rate over time, which can lead to substantial wealth accumulation.
How does the speaker describe the potential long-term growth of a $10,000 investment in the S&P 500 index fund over 40 years?
-The speaker describes that if the average return from the S&P 500 holds steady at around 10%, a $10,000 investment made at the age of 22 could grow to over $450,000 by the time of retirement.
What is the 'Mad Money' approach to portfolio management suggested by the speaker?
-The 'Mad Money' approach suggests having two portfolios: one for capital preservation and some appreciation in a diversified fund, preferably an index fund, and another for more aggressive individual stock picking, which is referred to as 'Mad Money'.
What is the importance of starting to invest at a young age according to the script?
-The importance of starting to invest at a young age is that it allows for more time for the magic of compounding to work, leading to greater long-term capital gains.
What does the speaker suggest is the best way to manage money for financial independence?
-The speaker suggests that the best way to manage money for financial independence is through investing in the stock market, particularly through low-cost index funds or ETFs, and allowing the power of compounding to grow the investment over time.
How does the speaker address concerns about the stock market being rigged or too risky?
-The speaker addresses these concerns by providing historical data showing the average annual return of the S&P 500 and emphasizing that stocks have the best average return compared to other asset classes.
What is the investment strategy suggested for those who are middle-aged or senior citizens?
-The investment strategy for middle-aged or senior citizens is not explicitly detailed in the script, but the general theme is that generational investing strategies should be adapted based on one's age and life stage, with an emphasis on the importance of investing in the stock market regardless of age.
What is the role of dividends in the investment strategy discussed in the script?
-Dividends play a crucial role in the investment strategy as they contribute to the overall return on investment and can be reinvested to take advantage of compound interest, thereby increasing the investment's value over time.
Outlines
💰 Stock Market as a Path to Wealth
The speaker, Kramer, introduces the concept of using the stock market as a tool for wealth creation and social mobility. He emphasizes the importance of investing wisely to grow wealth, especially for those not born into wealth. Kramer argues that even without a high-paying job, consistent saving and smart investing can lead to financial independence. He highlights the historical performance of the stock market, particularly the S&P 500, as evidence of its effectiveness in wealth creation over the long term, despite short-term volatility. The speaker encourages viewers to invest in the stock market, even during bear markets, as part of a long-term financial strategy.
📈 The Power of Compound Interest in Investing
Kramer discusses the principle of compound interest as a key factor in wealth accumulation through investing. He illustrates how the S&P 500's historical average annual return of about 10 percent can lead to significant wealth growth over time. The speaker uses the example of a $100 investment growing exponentially over several years due to compounding. He stresses that the younger one starts investing, the more time they have for their money to grow, which can lead to substantial wealth by retirement age. Kramer also addresses the misconception that a 10 percent return is not impressive, explaining that over a long-term horizon, this rate of return is highly effective in growing wealth.
🏭 Valuing Companies and Future Earnings
In this paragraph, Kramer addresses the question of how to value one company versus another, focusing on the measurement of future earnings streams. He explains that understanding a company's potential future earnings is crucial for determining its value and what investors might pay for its stock. Kramer suggests that a long-term view can provide insight into a stock's potential for capital gains and dividends. He emphasizes the importance of considering both capital preservation and appreciation when investing in the stock market, and he encourages viewers to think about a company's future earnings potential as a primary factor in stock valuation.
Mindmap
Keywords
💡Investment
💡Stock Market
💡Wealth Creation
💡Financial Independence
💡Compound Interest
💡S&P 500
💡Generational Investing
💡401k Plan
💡IRA
💡Mutual Funds
💡Index Funds
Highlights
The mission is to make money and level the playing field for all investors, emphasizing the potential of finding a bull market.
Introduction of Kramer, the host of Mad Money, who aims to educate and help viewers build and preserve wealth.
A belief that the stock market is the best ladder for social mobility in the country.
The challenge of becoming rich without being born into wealth, and the importance of a financial strategy for lifetime wealth creation.
The concept of generational investing and how strategies differ based on age and life stage.
The stock market as the most effective method for wealth creation, even in bear markets.
Historical perspective showing the S&P 500's average annual return, including dividends, is about 10 percent.
The assertion that stocks are the best and only game in town for wealth growth.
The importance of investing in the stock market regardless of age or wealth level.
The power of compound interest and how it can turn a small investment into a significant fortune over time.
An example calculation showing how a $10,000 investment can grow to over $450,000 over 40 years with a 10% return.
The advantage of starting to invest early due to the benefits of compounding over a longer period.
The recommendation to have two portfolios: one for capital preservation and one for aggressive growth.
Advice on valuing a company by measuring its future earnings stream for investment decisions.
The distinction between capital gains for preservation and appreciation in investment strategy.
The importance of dividends and reinvestment for long-term wealth accumulation.
A call to action for viewers to engage with the show through social media, email, and phone for questions and interaction.
Transcripts
my mission is simple to make you money
I'm here to level the playing field for
all investors there's always a bull
market summer and I promise to help you
find it
mad money starts now
hey I'm Kramer welcome to mad money
welcome to Kramer the people want to
make friends I'm just trying to save you
some money my job is not just entertain
you but educate and teach so call me at
one eight hundred and seven four three
cm you see or tweet me at Jim Kramer
every night I come out here for two big
reasons the first is obviously I like
the attention but the second and more
important reason is I want to help you
build and preserve your wealth we live
in a world where it's increasingly
difficult to become rich if you weren't
born that way and love it or hate it I
believe that the stock market is the
best ladder we have in this country for
social mobility there are millions upon
millions of people in this country but
there simply aren't that many jobs that
pay you a salary fat enough to actually
make you rich even if you're a total
cheapskate and save nearly every single
penny you worm the truth is if you want
to become really wealthy in this country
unless you're born with a silver spoon
in your mouth that means planning your
financial strategy for an entire
lifetime even if you don't have a super
high paying job as long as you can save
a decent chunk of your paycheck and then
invest it wisely year after year you can
make your wealth grow to the point where
you become if not filthy rich then at
least the very least financially
independent meaning you don't need to
worry about your job security or where
your next paycheck is going to come from
and you'll be able to retire easily
without the need to rely on Social
Security which for all we know might not
even be around with some of our younger
viewers hit retirement age that's why
tonight tonight I want to help you
figure out the best way to manage your
money in order to help achieve real
financial independence house of pleasure
but in order to do that we need to talk
about the concept of generational
investing because the kind of strategies
that makes sense when you're young and
in your 20s are very different from the
sort of things you should be doing when
you're middle-aged
or a senior citizen for that matter we
don't talk enough about that on Mad
Money tonight's different but there's
one constant when it comes to managing
your finances no matter how old you are
and that's the fact that you will never
get a better opportunity to make your
money work for you than by investing in
the stock market even when we're in a
bear market
when the action is treacherous in ball
and the feels-like stocks go down every
single day when you take a long-term
view it's easy to see the stock market
is by far the most effective method of
wealth creation out there sure it might
go down for weeks pretty much are you
everybody good at four years it might
crash like it doesn't on occasion but if
you take the long view the very long
view stocks tend sue me stocks tend to
go higher and I don't say that it's some
sort of Pollyanna when I got started in
the business in the early 1980s the Dow
Jones Industrial Average was trading in
the 800 and despite multiple bear
markets between then and now the Dow
currently stands what you might call
well above that mark right that
represents a pretty fantastic amount of
wealth creation and that's why I'm so
adamant that no matter how old you are
no matter how wealthy you are you really
should have some of your money socked
away in this in the stock market and for
those of you are concerned that the
markets rigged that it's dangerous and
it's simply too unreliable or unsafe a
place to trust your savings can I give
you some historical perspective right
now if you go all the way back to 1928
that's right before the great stock
market crash that preceded the Great
Depression through the end of 2014 the
average annual return for the S&P 500
including dividends is about 10 percent
show me an asset class with a better
average return you can't do it stocks
aren't just the best game in town
they're the only game in town if your
goal is to grow your wealth now for some
of you who want to get rich quick rather
than gibbers carefully see what I did
there that 10 percent average annual
return for the S&P 500 I know it may not
seem like such an impressive number
somebody probably saying well thanks for
nothing wait a second you're wrong
you're just wrong forget the fact that
it's more than double what you can even
get to expect from a 30-year Treasury or
it's Tiffany's the deposit I'd be named
earning next enough let's examine that
10 percent figure in absolute terms when
you're taking a long-term view which is
what we're doing tonight meaning
planning for your entire lifetime
racking up a 10 percent return from a
simple inexpensive S&P 500 in
it's fun which you know I prefer starts
to seem pretty darn impressive sure the
markets going up it's up yours in it's
down your's but over a long enough time
frame that ten percent figure including
dividends has held pretty steady but to
really understand the value of an asset
class that tends to give you a 10
percent return the average year you need
to view this number through the lens of
what's known as compound interest
sometimes I'll talk about this as the
magic of compounding think of it like
this if you invest $100 in the S&P 500
and it gains 10 percent in the first
year then you've got one hundred and ten
dollars after another year of ten
percent gains you've got one hundred and
twenty one dollars a third year of the
same gives you one hundred and thirty
three dollars the games keep getting
larger and larger because each year
you're making additional money off the
previous year's profits eventually with
a ten percent average return you'll
double your money in roughly seven years
now for those of you who are really
young right out of college waiting seven
years to double your money I know it
seems like an eternity and listen I've
got more risky ways of growing your
capital faster if you stayed - however
the truth is that as you get older and
investment they can pretty consistently
you know take your money up in seven
years time and double it well I'll tell
you it just becomes pretty incredible
that said the magic of compounding works
best the younger you are because that
means you have more time for your money
to grow yet sadly young people are the
least likely to be impressed by that
kind of steady capital appreciation
that's why acclaimed economist George
Bernard Shaw famously said that youth is
wasted on the young
okay wasn't a constant good writer
though so let me do my best to make
these numbers sound more impressive I'm
going to walk you through it suppose
you're 22 years old and you're just
entering the workforce you've got more
than 40 years before you're expected to
retire so let's say you invest $10,000
in an S&P 500 index fund right now and
let's also suppose that the next 40
years aren't too different from the last
40 years in that case of the average
return from the S&P 500 hold steady at
around 10% that in four decades your
$10,000 investment will turn out to be
worth more than
[Music]
450,000 dollars that's enough to send
multiple children through college grad
school buy a nice house in most parts of
the country pay for a huge chunk of a
pretty ritzy retirement and that monster
multi-year game it didn't require any
kind of stock picking it doesn't require
you to trade or time the market or even
do any sort of research into individual
companies which I know is hard for most
of you you just need to invest your
money and a low-cost S&P 500 index fund
or ETF there's some commissions there
and then you wait granted you're waiting
waiting 40 years but for $50,000 when
you're approaching the age many people
retire it seems a lot more valuable than
the initial ten thousand dollar
investment you made when you were young
and had your entire work life ahead of
you
to make money the regular way so please
I'm begging you
think of it like this a little money
saved and passively invested the stock
market is the easiest way possible when
you're young to turn can turn into a
massive fortune when you're old and have
all sorts of additional costs
responsibilities and all you have to do
if you initially save that money is let
it sit on the sidelines ideally in a
401k plan or IRA so that you don't have
to make capital gains or dividends axes
on your gaze the same logic applies if
you're 30 or 40 or even 50 but you get a
lot more bang for your buck if you start
younger which brings me to the bottom
line even if you don't have time to do
homework the stock market is still the
best tool out there for growing your
wealth and thanks to the magic of
compounding the earlier in your life you
start investing in the market the bigger
your long-term capital gains can be and
of course it's not just not just capital
gains but also dividends
everything gets reinvested let's go to
Brenton in New Mexico bring jim cramer
big booyah from the land of enchantment
how are you sir I am good how about you
I'm doing fine thank you
hey Clark general question mutual funds
and index funds claim
minimizing single-stock risks right but
inherently though isn't it fair to say
that mutual funds and index funds have
other risk that you would avoid with a
single stock portfolio absolutely and I
think that that's why I always suggest
that there would be two portfolios there
should be that capital preservation and
and somewhat appreciation fund that is
going to be we put that aside for
retirement and that should be in a
diversified fund I prefer to be an index
fund and the rest should be Mad Money a
sliver of it though man money we pick
individual stocks that's why we call the
show man money I don't want the bulk of
your portfolio and individual stocks
there's too much single stock risk but I
want you to be able to pick stocks and I
know you want to do it or you wouldn't
be watching the show brought Brian in
Oklahoma Brian thanks for having me
first-time investor how do you how do
you value a company's one company versus
another measure their value well we
spent a lot of time to get rich
carefully talking about that and what
you're really trying to do is measure
the future earnings stream and if you
can measure the future earning stream
you can figure out what you'll pay for
that or any stream now and what really
matters is that if you take a
longer-term view you can get a feel for
what that stock might be able to give
you forgiving ins and capital gains
dividends tend to be for capital up for
preservation and then the capital gains
this cap is for the appreciation stream
I want you to have a little bit of both
but you got to be thinking about what a
company can earn in the future that's
what dictates stock prices this show is
about helping you build and preserve
your wealth and the stock market is the
best tool out there to do that lot more
man money ahead including the
four-letter word of invest of the
investing world what it is and why the
conventional wisdom about it is
plus I'm not pulling punches here what
you absolutely must not be doing in your
retirement camp and I'm unveiling the
rules you need to navigate in the bear
market so stay with Kramer don't miss a
second of that money follow at Jim
Cramer on Twitter have a question tweet
Kramer hashtag mad tweets send Jim an
email to mad money at cnbc.com
or give us a call at one eight hundred
seventy three CNBC miss something head
to Mad Money does cnbc.com
[Music]
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