What should you know?
Einstein said “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
Compounding is the snowball effect on your money, when you receive growth on the capital you’ve invested, and the growth previously accumulated.
As you can see in the chart below, compound growth accelerates your wealth accumulation over time:
Notice how, in the latter years (when compounding is working its hardest), the $100,000 that takes you to $1m accumulates in a fraction of the time it took to arrive at the first $100,000.
Why should you care?
Building wealth takes time and discipline. In the beginning, you do all the ‘heavy lifting’ by way of your contributions. Don’t lose patience if your investments haven’t sky-rocketed in value in the early years, just focus on adding as much as possible into your investments.
As time goes by, returns will play an ever-increasing role in the growth of your wealth. Eventually, investment growth will take over entirely, and your contributions will become secondary.
The only way to capture the full benefits of compound returns is to stay fully invested in equity markets over the long term. Your discipline and patience will be handsomely rewarded.
That’s why we always remind you that successful investing is about TIME in the markets and not TIMING the market.
