Before we discuss how to harness the power of the snowball effect, we must understand the power of compounding. The snowball effect is a metaphor for compounding.
It explains how small actions carried out over time can yield significant results. In the same way, investing in high-quality dividend-growth stocks can generate large amounts of dividend income over long periods.
The snowball metaphor visually shows the power of compounding.
“The most powerful force in the world is compound interest.”
– Albert Einstein.
Here’s the power of:
Imagine you invested $1 that compounded at 1% a day. In 5 years, your $1 would grow to over $77 million. You would be the richest person in the world by year 7.
Keep in mind that compounding is not a get-rich-quick scheme. It takes time – and lots of it. No investments compound at 1% a day in the real world.
Compound interest is interest earned on money that was previously made as interest. This cycle leads to increasing interest and account balances at an increasing rate, sometimes known as exponential growth.
The concept is often referred to as the “snowball effect” since a small snowball quickly becomes huge as it picks up snow while rolling down a hill.
However, the snowball doesn’t just gain size constantly while rolling downhill. It accelerates its mass gain. This is because the bigger it gets, the more snow it gains with each revolution since the snow it accumulated on its previous trajectory is now contacting the ground and picking up snow in addition to the original snow on the ball.
The snowball effect can apply to high-quality dividend growth stocks, such as the Dividend Aristocrats and Dividend Kings, which have increased their dividends for 25+ and 50+ consecutive years, respectively.
Warren Buffett compounded his wealth through a specific type of investment.
Specifically, Buffett invests in:
- Shareholder-friendly businesses
- With strong competitive advantages
- Trading at fair or better prices
“All there is to invest is picking good stocks at good times and staying with them as long as they remain good companies.”
-Warren Buffet
The snowball effect is real and powerful. Take advantage of the snowball effect by investing early and often!
