To illustrate this concept and its impact on long-term wealth creation, we can look at the Rule of 72. This simple rule provides a quick estimate of how long it takes for your money to double. For instance, with an average annual return of 10%, your capital will need approximately 7.2 years to double (72 ÷ 10 = 7.2). It might seem like a basic math trick, but its true power is widely underestimated. Just think about it: €10,000 invested over 40 years at a 10% return grows into a staggering €452,593.
Why use 10% as a benchmark? Because the average nominal return of the primary reference market—the US stock market—has historically hovered around that 10% mark.
Another crucial distinction between an investor and a speculator lies in how they view their assets. An investor focuses on the actual cash flows an investment generates. A speculator, on the other hand, relies on hypothetical future gains, hoping to sell at a higher price than they paid.
This framework helps us categorize asset classes based on their true purpose. Buying physical gold is inherently speculative because it doesn’t produce any cash flow—unlike a bond, which regularly pays out a coupon. If you want exposure to gold, you are generally better off investing in a fundamentally strong, cash-generating company rather than simply buying a gold ETF. If your market timing or predictions are off, a robust business can weather the storm much better than the raw commodity’s price. After all, a cubic meter of gold is just a cubic meter of gold—whether you hold it for 10 minutes, 10 hours, or 10 years.