Small investment returns can add up with the power of compounding.
A widely used 8% historical return for the stock market calculates potential portfolio growth over time. Some years that seems very optimistic, but it actually provides a true average return measurement.
At first glance monthly, returns may seem tiny and inadequate when you compare them to long-term financial goals. However, percentage gains of only 1 percent or less for a month are still significant when annualized, this gives a much clearer picture of performance.
Options traders may employ credit strategies to generate revenue every month. Writing a covered call on an existing stock position can increase returns.
Small percentage increases of just one percent per month add up to 12% over the course of the year.
The rule of 72 is useful to put big and small returns in perspective.
Take 72 and divide by the annualized investment return to determine how long that would take to double an investment.
For example, ¾ of a percent return in a month turns into 9% annualized. Pretty amazing, right?
Divide 72 by that 9% annualized return and it will only take 8 years to double your money with only a 3/4 percent monthly return.
A small consistent rate of return month after month can make a huge impact!
