A key principle of the Child Millionaire portfolio is to unlock the power of compound interest over the long period of time available when starting an investment portfolio for a newborn or young child.
How powerful is compound interest over very long perods of time?
Back in 1626, so the story goes, Peter Minuit bought the island of Manhattan in present-day New York from the local indigenous people for $24 and some trinkets. Most people would say that Peter Minuit made a shrewd investment and came out on top in the deal. However, had the sellers of Manhattan been able to invest their $24 at 8.92% per annum– the real long term ‘compound annual growth rate’ of the then-not-yet-created New York Stock Exchange (NYSE) before inflation – 385 years later in 2011, their investment portfolio would be worth a staggering $4,641,408,773,625,668.
That’s $4.6 trillion dollars.
Even using the long term compound annual growth rate for the NYSE of 6.72% per annum after inflation, the $24 would have grown to $1,798,252,290,351 in today’s dollars. That’s $1.8 trillion dollars, or about one eighth the size of the entire gross domestic product (GDP) of the United States of $14.5 trillion.
Clearly the sellers had neither the knowledge nor the opportunity to invest their $24 but this example does illustrate next secret of creating a Child Millionaire and a vital part of compounding: lots and lots of time.