Why Small Differences in Investment Returns Matter Over Time

A simple idea with a powerful impact

Over long periods, small differences in annual investment returns can lead to significantly different outcomes.

This is known as compounding - the process where returns build on previous returns over time.

Even a modest increase in annual performance, when sustained over decades, can result in a substantially larger portfolio value.

Case study: Warren Buffett vs the S&P 500

Warren Buffett, through Berkshire Hathaway, achieved approximately 9% per year above the S&P 500 over a 60-year period to 2025.

While this level of outperformance is exceptional and not typical, it clearly demonstrates the effect of compounding.

Key takeaway:

• A relatively small annual difference

• Sustained over a long time

• Leads to dramatically different financial outcomes

  
  

What drives long-term investment outperformance?

Two key factors are often behind strong long-term returns:

1. High-quality businesses

Companies that:

• Generate strong earnings

• Sustain and grow those earnings over time

  
  

2. Time in the market

Holding investments over long periods allows compounding to work effectively.

A simple way to understand compounding (Charlie Munger’s view)

Charlie Munger summarised this concept clearly:

“If a business earns 6% on capital for 40 years, your return will be similar to 6%…If a business earns 18% for 20–30 years, even at a high price, the result can be exceptional.”

What this means in practice:

• Investment returns often follow the underlying quality of the business

• Long-term holding periods are critical

• Entry price matters, but quality and time matter more

Why time is one of the most important factors in investing

Time allows:

• Compounding to take effect

• Short-term volatility to smooth out

• Long-term growth to materialise

For patient investors, time is often the most valuable asset.

However:

• Not all investments perform consistently

• Returns are not guaranteed

• Outcomes vary depending on strategy and market conditions

  
  

Are these results realistic for most investors?

No - and this is important.

• Buffett’s performance is exceptional, not typical

• Most investors will not outperform the market to this extent

• Different strategies suit different individuals

The role of financial planning:

A structured plan helps align:

• Investment approach

• Risk tolerance

• Long-term goals

Practical takeaway: focus on what you can control

While you cannot control markets, you can control:

• Investment discipline

• Time horizon

• Portfolio structure

• Behaviour during market volatility

In simple terms:

Consistency and patience tend to matter more than trying to outperform.

Frequently asked questions

What is compounding in investing?

Compounding is the process where investment returns generate additional returns over time, leading to exponential growth.

Why do small return differences matter?

Because over long periods, even a 1–2% difference annually can significantly increase final portfolio value.

Is it realistic to outperform the market like Warren Buffett?

No. Such performance is extremely rare and should not be expected.

What is more important: timing or time in the market?

Time in the market is generally more important for long-term investors.

A note on balance and perspective

Outside of investing, maintaining balance is just as important.

Stepping away from constant news and market noise can help maintain a clearer, more rational perspective over time.

Important information

This content is provided for general information only and does not constitute investment advice.

Past performance is not a reliable indicator of future returns.

The value of investments and any income from them can fall as well as rise and is not guaranteed. You may get back less than you invest.