There is one investment principle that, if you truly understand it, will help you make the smartest financial decisions and create the most wealth in the long run.
I know that sounds like hyperbole, but I assure you, it’s not. I cannot overstate how important this principal is.
The most important investment principal is…
The principle is simple: buy the investments with the strongest past evidence and fundamentals to deliver the highest expected long-term return from now until age 60, and ideally well beyond.
In other words, you are not trying to pick what will do well this year. You are trying to choose the investment, be it an ETF, property or otherwise most likely to produce the highest return, on average, over the next 20–30+ years.
Then you must stack the odds further in your favour by:
- Keep costs and tax drag as low as possible, so more of your return stays invested and compounds for you.
- Choose something you can stick with, because the best portfolio on paper is worthless if it triggers poor decisions. From a behavioural finance perspective, it is best to choose assets that require minimal emotional energy and time to manage.
Investment selection: Highest average return between now and age 60-80
Albert Einstein is often credited with the line: “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who does not, pays it.”
Here is the catch: in real life, the impact of compounding is basically meaningless in the first 10 to 15 years. You largely must take it on faith, because by the time the compounding engine becomes obvious, it’s too late for most people to take advantage of it.
A common example is Warren Buffett. People often cite that most of his wealth was created after age 65. Whether you use 95%, 97%, or another figure depends on how you measure it, but the underlying point is correct: the last part of the journey is where the money gets made.
That is why compounding is so deceptive. In the early years of your investment journey, it looks like nothing much is happening. Your net worth appears to rise mainly because of the capital you contribute from your after-tax savings. You are doing all the hard work, and the investment returns feel small and almost irrelevant.
But that is precisely how compounding works. It is not linear. It is exponential. It starts quietly, then it becomes absurd.
To make this tangible, let’s assume an average long-term return of 10% p.a. – which is what share markets have delivered over the past 4+ decades. If you invest $500,000 today and earn 10% p.a., the additional growth you get from returns in each decade looks something like this (ignoring tax and fees):
- Years 1–10: about $800,000 of returns (around $80,000 per year on average)
- Years 11–20: a further $2 million+ (over $200,000 per year)
- Years 21–30: a further $5 million+ (over $500,000 per year)
- Years 31–40: a further $14 million (around $1.4 million per year)
At that point, the numbers almost stop being useful, because they are hard to relate to. That is not a flaw in the maths; it is the nature of exponential growth. It is not intuitive.
This is why understanding compounding now matters. Today is when time is still on your side.
And it is why investment selection is fundamentally a multi decade-long decision. You should assume you will own that ETF, property, or portfolio for multiple decades. With that time horizon, the job is not to chase what will do well next year; it is to select the assets that give you the highest probability of delivering the highest average return over your lifetime. That is Warren Buffett’s advice – he has stated that his favourite holding period is forever.
Reduce cost and tax drag, so more of your return compounds
If you minimise fees and tax, you keep more of your return. And what you keep is what compounds. Over decades, that difference is not insignificant.
With share markets, index investing (whether via an ETF or an index managed fund) usually means fees are already relatively low. That said, some investors become uneconomically obsessed with minimising fees. Fees matter, but they are only one input. The real objective is to maximise returns after fees and after tax. An ETF with a very low fee is not attractive if its future returns will be below average.
In practice, we use some index funds with fees as high as around 0.70%, while the weighted average cost of our portfolios is around 0.30%. My point is simple: our portfolios use plenty of very low-cost ETFs and managed funds, but we will also use higher-cost products when the expected benefit justifies the cost.
Investing in direct property is different. Cost control is harder because you are mostly a price-taker. The levers you can pull are fairly narrow:
- Ensure your property management fee and insurance premiums are competitive
- Make sure your loan interest rate is optimised
- Be disciplined with maintenance: approve what is justified, challenge what is not
Beyond that, the costs largely are what they are – you can’t negotiate on land tax or council rates unfortunately.
On the tax side, there are really two big areas where you can reduce the “tax drag”:
- Get the ownership structure right from day one. How you own the asset determines how taxable income, deductions, and negative gearing benefits flow. If you get this wrong at the start, it is often expensive (or impossible) to fix later.
- Select investments where most of the return is from unrealised capital growth. The best compounding happens when returns are not constantly being drained by the ATO. All else equal, an asset that delivers a larger portion of its return via unrealised capital growth (rather than taxable income and realised capital gains) is a lot more compounding-friendly.
In share portfolios, this can show up through things like a tilt to international equities (as Campbell has recently discussed here) or using internally geared ETFs, where appropriate. Investment-grade property delivers most of its return as capital growth, which is one reason it can be a powerful long-term compounding asset.
How much time it takes to manage an investment
The time it takes to manage an investment, and the number of decisions it demands from you, is an underappreciated factor in long-term success.
One of the goals of investing is to make your money work harder than you do. That is why simplicity matters – because it’s hands off and something that you’re more likely to stick with.
A portfolio of ETFs can be largely set-and-forget. Direct property is a more hands-on investment, and you need to be realistic about what that means.
In my experience, investors in their 20s, 30s and 40s tend to be perfectly comfortable managing property. The workload is often lumpy. Sometimes nothing happens for six months. Other times you get hit with a major maintenance issue, a difficult tenant, or a vacancy at the worst time, and suddenly it is consuming a lot of your time and attention.
Older clients, particularly those who are retired, are often less willing to deal with that friction. It is not that they cannot do it. They simply do not want to spend their time that way.
Then there is the emotional side. Every decision costs emotional energy. If an investment forces you to make frequent decisions, even “small” ones, it can create decision fatigue. And decision fatigue is a threat to compounding because it increases the chance you will capitulate and sell.
From a behavioural finance perspective, the best investments are ones that demand very little time and very few ongoing decisions. Not because they are exciting, but because they are the ones you are most likely to hold for many decades.
The takeaway is: before you invest, be honest with yourself about the time, attention, and emotional energy you are willing to commit.
With property, think decades
When investing in property, the temptation is to think short term, because that is where all the media commentary lives. Prices this quarter. Auction clearance rates this weekend. The next RBA move. It trains you to focus on all the noise.
But property is not a short-term game. If you understand compounding, the real outcome is driven by capital growth over the next 30 or 40 years. The problem is that thinking on that timeframe is psychologically unnatural. We are hardwired for immediate results and near-term gratification.
Even so, mathematically, and fundamentally, the long-term approach is the right one.
To my mind, the best way to stay anchored is to focus on fundamentals and buy investment-grade property in locations where demand is structurally strong, and supply is structurally constrained. You might be wrong in the short term, but over decades, that combination tends to do the heavy lifting.
Shares: an index that you’d be happy to own forever
To my mind, the best way to build an ETF portfolio is to choose indexes that are fundamentally sound – an ETF you would be comfortable owning for the rest of your life – and then buy them when they are relatively cheap.
That does three things for you.
First, it stacks the odds in your favour at the point of entry. Paying a sensible price reduces risk.
Second, it increases the probability that your medium-term returns will be above average, because markets tend to mean revert when valuations are stretched in either direction.
And third, it gives you a robust long-term foundation. If the index is fundamentally sound, you can be confident that the long-run return is likely to be acceptable, which makes it far easier to hold through the inevitable cycles and volatility.
Media and noise are always inherently short term
In the first couple of years after I started ProSolution in 2002, buying units/apartments in Townsville was the “hot” strategy. The initial hook was rental yield: you could buy at a very high yield and, in many cases, get close to positive cash flow.
That investor demand did what it always does: it pushed prices up. And then, after that early burst, many of these properties basically went nowhere for many years.
More recently, the cycle has turned again, and Townsville units have enjoyed another period of strong growth. All markets move in cycles. I’ve seen it all before.
The more useful question is: how has a genuine long-term investor done?
Back in 2003, two-bedroom units were selling for roughly $140,000 to $170,000. Today, similar properties are more like $450,000 to $500,000. Over 23 years, that works out to less than 5% p.a., which is okay but not great.
This is a good example of why short-term returns never create long-term value. There is always someone dangling a shiny carrot, trying to pull you into a short-term decision. You can chase the shiny object if you want, but it will always come at the expense of something more prosperous over the long run.
Real success comes from choosing an investment that will stand the test of time and compound over many years. The best ones are not necessarily exciting in the moment, but they are the ones you will look back on in retirement and quietly thank yourself for buying and then simply holding.
