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The Power of Compounding

The Power of Compounding

If you take a chessboard and place a single grain of rice on the first square and then double the number of grains in each subsequent square until you reach square 64, what is the cumulative weight of rice on the chessboard? It seems inconceivable, but the weigh amassed is 461 billion tonnes!

So, a weighty point, and the phenomena of compounding applies very much to money. Those with a long-time horizon can really benefit, as money makes money, it’s the ‘snowball effect’, when your earnings generate even more earnings. You receive interest not only on your original investments, but also on any interest, dividends, and capital gains that accumulate—so your money can grow faster and faster as the years roll on.

This is particularly relevant in equity markets, by investing in companies with growing profits and dividends, either by investing directly in those companies, or through collective instruments, such as mutual funds. As notes above though, the power of compounding takes time, and you will need to invest through the transitory noise of political and macroeconomic events. Albert Einstein referred to compound interest as “the most powerful force in the universe”, and the investment guru Warren Buffet stated once, “my wealth has come from a combination of living in America, some lucky genes, and compound interest”.

Now, there are of course no guarantees of the future, but what we do know is that saving for retirement, or any other purpose is best started early and who knows you could be a huge beneficiary of the compound miracle!

The past performance of any investment is not necessarily a guide to future performance. The value of investments may go down as well as up.

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Flamingo Capital Limited. © 2018