What is the return-on-investment effect and how can you make the most of it?

Investing is one of the most powerful ways to build wealth. And fair is fair, who doesn't want their money doing the dirty work for them? An important concept involved is the return-on-return effect. This effect is basically a kind of financial snowball that gets bigger and bigger the longer it rolls down the hill. In this article, we'll take a closer look at exactly what the yield-on-return effect is, how it works, and how you can make the most of it to grow your wealth. So, buckle up, we're off to your financial mountaintop!

What is the return-on-return effect?

The return-on-interest effect, also known as the compound interest effect, is the phenomenon where you earn a return not only on your initial deposit, but also on the return you generated previously. It's a bit like getting interest on interest, and that interest also gets interest.... And so it goes on and on. Simply put, it's a financial version of "the one apples to apples eventually yields a whole fruit basket." Keep that fruit basket coming!

For example, suppose you invest €1,000 and achieve an annual return of 6%. After the first year, you have earned €60, making your total €1,060. In the second year, you get a 6% return on €1,060, making €63.60. That may seem small, but in the long run this effect can reach gigantic proportions, just as you just can't pass up "one more cookie."

What is the effect of long-term investing?

The return-on-return effect works best when you invest over a long period of time. This is because time is a critical factor in maximizing returns. In the first few years of investing, the return is like a sapling that grows slowly. But as the years go by, that little tree grows into a mighty oak tree, offering you shade (and perhaps some extra acorns) in your old age.

Suppose you invest €1,000 a year for 30 years with a 6% return. In the first 10 years your total return will be modest, but after 30 years you will see exponential growth. This is because you not only earn returns on your original deposit, but also on all the returns you earned in previous years. As a result, your wealth grows much faster in the latter years than in the early years, a bit like your favorite series that only gets really exciting after season 2.

How does the return-on-return effect help build wealth?

The return-on-return effect is one of the most powerful ways to build wealth because it causes your money to multiply itself. It's like your money throwing a party and inviting more and more friends over, and best of all: all you have to do is enjoy the fun (or in this case, your growing wealth).

For example, if you decide to leave your investments for 30 years, your wealth will be many times greater than if you left the same amount for only 10 years. The power of the return-on-return effect is in time. The longer you have time to invest, the more you benefit from this effect. A bit like a well aged wine, it only gets better with age.

You can see an example of this effect in the table below: 

What is the best strategy to make the best use of the yield-on-return effect?

To take full advantage of the yield-on-return effect, there are a few strategies you can follow:

1. Start early: The earlier you start investing, the longer you can benefit from the return-on-return effect. Even small amounts can lead to big results over a long period of time. Think of that one plant you planted as a seed that is now taking over your entire balcony. You want that with your money too!
2. Invest regularly: Periodic investing helps spread risk and ensures that you continually benefit from the return-on-return effect. It's like sports: consistency is key (and it's good for your finances, too!).
3. Persevere: Patience is essential. It can be tempting to withdraw your investments when the market drops, but by persevering and growing your investments, you'll end up benefiting more. Because let's face it, even that dramatic cliffhanger on your favorite show had a great payoff, right?
4. Reinvest your returns: Make sure your returns are reinvested, so that they become part of the total amount that generates returns. It's a bit like a snowball getting bigger and bigger: it starts small, but before you know it, you have a snowman!

How does periodic investing work?

Periodic investing means that you deposit a fixed amount on a regular basis, such as monthly or annually. This has a number of advantages:

• Spreading risk: By investing regularly, you spread risk across different market moments, which can help cushion fluctuations in the market. Just like wearing a raincoat while hiking: you are prepared for unexpected showers.
• Easier scheduling: Automatically depositing a fixed amount helps maintain discipline and ensures you don't forget to invest. That way you don't have to worry, just like you never forget your morning coffee.
• Maximize return-on-return: Each new deposit adds to the total amount eligible for the return-on-return effect, which can lead to significant wealth in the long run. It's a bit like that one Netflix marathon: the more you watch, the better it gets!

The return-on-return effect is a powerful tool for anyone serious about building wealth. By starting early, investing regularly, being patient and reinvesting your returns, you can take full advantage of this effect. Investing is not just about how much you put in, but more importantly, how long you allow your investments to grow. The longer you take the time, the more you can benefit from the yield-on-return effect. And remember, just like a good wine, your investment gets better with time!