Features | Education | 7 Mins Read | by
Funds offer a way to get rich. The two ingredients you need are a satisfactory return and time.
If you are lucky enough to have US$50,000 it can be turned into US$2.3 million. You just need a 10% annual return and a 40 year investing period.
The ability to increase capital in this way is referred to as compound interest. Albert Einstein described compound interest as "the eighth wonder of the world." He went onto say:
He who understands it [compound interest], earns it; he who doesn't, pays it
Over a 40 year period, we will see bear markets, wars, depressions, recessions etc. The key is for an investment portfolio to bounce back after the declines.
A diversified portfolio should be able to do just that. Funds that generate a sufficient real returns will compound value over the long-term.
Funds deliver instant diversification. They are therefore a convenient tool for investors.
Passive funds as the default
There is a lot of pushback on funds with regard to fees, performance and transparency. But these criticisms generally only apply to active funds.
Passive funds are low cost, transparent and will perform in-line with their index.
The default approach is to invest in a low-cost passive fund. Active funds are only better if they can outperform their benchmark.