Albert Einstein dubbed compound interest the eight wonder of the world. It truly is when looking at the concept: investing money, earning interests/dividends/capital gains on investments, reinvesting said interests/dividends/capital gains/ thus earning more interests/dividends/capital gains.
It seems simple, yet it is a tad more complicated than it seems
Most people in the financial industry do not talk much about the time factor, when it comes to compounding.
You see, compounding is actually very slow to start. That’s why conventional wisdom says one should start saving as early as possible. But I almost digress here.
With compounding, time is actually not of the essence
For the sake of simplicity, let’s assume an initial investment of $ 10 000, with an additional monthly contribution of $ 100. Let’s assume a constant return of 5% for 25 years, and that interest is compounded monthly.
I am aware this is really unlikely to happen in really life, but I am writing for the sake of simplicity here!
After said 25 year-span, the $ 10 000 will turn into around $ 94 364. Great!
But when looking at the timeline, you realize your investment will take over 5 years to double, and an extra 4.5 years to triple.
It takes at least 15 years…
15 years is the mark where your investment starts to grow faster and another 3 years for cruising speed. Before that, progress is actually fairly slow.
Patience is the key word
A lot of people become discouraged, long before the 15 year mark. If the market becomes bearish, it can be even easier to give-up, but don’t!
By doing so, you will only have principal with very little interest/capital gains/dividends. Over the years, interest/capital gains/dividends will exceed the principal amount, and that is the beauty of compounding.