Compounding Effect in Investment

Compounding refers to the process of reinvesting assets and their generated interests for exponential growth over time. The compounding effect is a great investing strategy employed by famous investors like Warren Buffett to build wealth. The compounding effect has a direct correlation with time. Meaning that the earlier you invest, the more profits you will have. Therefore, it is more important for young investors. Even with a small investment, in the beginning, there is a huge upside potential over time. Money growth over time depends on three parameters. How much do you invest in the beginning? What is the rate at which your investment grows? How long do you wait (time factor)?

To better employ the compounding effect, create a portfolio that includes growth stocks, value stocks, and dividend stocks. You want to make sure the value of your portfolio grows over time. Also, make sure to reinvest dividend interests that companies pay you. Here, an example is given of how the compounding effect can generate wealth over time. Imagine you invest 100,000$ for a period of 10 years with a growth rate of 100%. You can have well over 100,000,000$ after 10 years:

Year Money

2020 100,000$

2021 200,000$

2022 400,000$

2023 800,000$

2024 1,600,000$

2025 3,200,000$

2026 6,400,000$

2027 12,800,000$

2028 25,600,000$

2029 51,200,000$

2030 102,400,000$

Here are a few selected quotes on the importance of the compounding effect:

  • "Compound interest is the greatest mathematical discovery of all time." Albert Einstein

  • "Compound interest is the eighth wonder of the world. He who understands it earns it ... he who doesn't ... pays it." Albert Einstein

  • "Time is your friend, impulse is your enemy. Take advantage of compound interest and don't be captivated by the siren song of the market." Warren Buffet

  • "My wealth has come from a combination of living in America, some lucky genes, and compound interest." Warren Buffet

  • "If you understand compound interest, you basically understand the universe. " Robert Breault

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