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 4th 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 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.