Well obviously we want to build wealth, but it’s important to realize how even a little extra % gain each year can be significant. Making or losing an extra 1% may seem insignificant over a year, but over a period of several years it’s effect becomes very significant.

“Compound interest is the 4^{th} wonder of the universe” quote sometimes attributed to Einstein.

The below table illustrates a £10,000 starting amount growing annually at 7, 8, 9 and 10 %. It also shows the final value difference between growing annualy at 7% compared to 8, 9 or 10%.

Starting Capital |
Annual Gain % |
Capital after 15 Yrs |
Difference compared to 7% after 15 Yrs |
Capital after 20 Yrs |
Difference compared to 7% after 20 Yrs |

10,000 |
7% |
£27,590 |
– |
£38,697 |
– |

10,000 |
8% |
£31,722 |
*15.0%* |
£46,610 |
20.4% |

10,000 |
9% |
£36,425 |
*32.0%* |
£56,044 |
44.8% |

10,000 |
10% |
£41,772 |
*51.4%* |
£67,275 |
73.9% |

£10,000 growing at 10% annually turned into £67,275 after 20 years, which is almost 73.9% higher that the £38,697 it would have become if grown at 7% annually.

If we continue for 25 years, for a portfolio growing an additional 3% per year, the final value after 25 years is almost **double** what is would have been!

This brief analysis doesn’t factor in regular contributions or the inherrent variability of annual performance – but does highlight the importance of making a few extra % every year across the whole portfolio (stop chasing those individual multibaggers that almost always dissappoint). Doing so makes a large difference to the future size of your pot of money.

Have i mentioned before that the average private under performs the wider market….? Imagine a typical investor who would have had triple the amount in capital after 25 years – if only they had matched the market (perhaps by buying a index tracking fund). They have missed out on a lovely compounded growth in capital. The truth is they may have given up long before faced with continued disappointing investing results.

**Ok, so how do I go about harnessing the power of compound interest…? See my next blog post for an overview of how i would tell a friend or family member to invest, if they’ve already decided they want to invest in the stock market.**