Jim Cramer: How compounding can help you double your money in 7 years

Summary

In 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

00:00

💰 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.

05:00

📈 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.

10:02

🏭 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.

Keywords

💡Investment

Investment refers to the allocation of money with the expectation of generating income or profit. In the video, investment is the central theme, emphasizing the importance of investing in the stock market to grow and preserve wealth. The script mentions investing in the S&P 500 index fund as a means to achieve financial independence.

💡Stock Market

The stock market is a platform where shares of publicly traded companies are bought and sold. The video highlights the stock market as a crucial tool for social mobility and wealth creation, advocating for long-term investment strategies despite market fluctuations.

💡Wealth Creation

Wealth creation is the process of increasing one's net worth through various means, including investments. The video's speaker, Kramer, discusses wealth creation through long-term stock market investments, illustrating the potential for significant returns over time.

💡Financial Independence

Financial independence is a state where one's income-generating assets are sufficient to cover living expenses without reliance on active employment. The script mentions financial independence as a goal achievable through wise investing, allowing individuals to retire comfortably.

💡Compound Interest

Compound interest is the addition of interest to the principal sum of a loan or deposit, itself. The video explains the 'magic of compounding' as a powerful tool for wealth growth, showing how small initial investments can grow substantially over time due to compound interest.

💡S&P 500

The S&P 500 is a stock market index that measures the performance of 500 large companies listed on stock exchanges in the United States. The script uses the S&P 500 as an example of a diversified investment that has historically provided an average annual return, underscoring its role in wealth creation.

💡Generational Investing

Generational investing refers to investment strategies that change based on the investor's age and life stage. The video script touches on this concept, explaining that investment approaches should evolve from youthful risk-taking to more conservative strategies as one ages.

💡401k Plan

A 401k plan is a retirement savings plan in the United States that allows employees to invest a portion of their paycheck before taxes. The script suggests using a 401k plan as a tax-efficient way to save and invest for retirement, highlighting its benefits for long-term wealth accumulation.

💡IRA

An Individual Retirement Account (IRA) is a tax-advantaged investment account for individuals. The video mentions IRAs as another vehicle for tax-deferred savings, emphasizing their role in retirement planning and wealth preservation.

💡Mutual Funds

Mutual funds are investment vehicles that pool money from many investors to invest in a diversified portfolio of stocks, bonds, or other assets. The script discusses mutual funds as a way to minimize single-stock risks, suggesting a balanced approach to investing that includes both mutual funds and individual stock picking.

💡Index Funds

Index funds are a type of mutual fund or exchange-traded fund designed to track the performance of a specific market index. The video recommends index funds as a low-cost, diversified investment option, suitable for long-term wealth building.

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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