Magic of Compounding

Albert Einstein said, “The eighth wonder of the world is compound interest.” He’s still right, even in today’s marketplace.”

Good investors use this magic. But can you become a millionaire with the simple tactic of compounding?

Statistics show most millionaires don’t inherit their wealth or win a lottery.  Many ordinary people just save patiently and invest regularly to retire as millionaires, even if they invest only a little each month.  Time is a great friend.  Patient stock market investors who let time work for them benefit from “compounding.”

The magic of compounding happens when you don’t touch your original investment and let returns add up.  For example, if you invest $500 a year (about $12.50 a day) at a 10 percent annual return, you would have over $10,000 after 11 years.  Invest $1,000 a year at a 10% return, and you accumulate $10,000 in just 7 years.  That is equal to more than $1 million in 48 years.  Investing sooner gives your nest egg more time to grow and compound, too.

Every investor wants the best returns combined with the least risk of losing money.  But, the higher the potential return, the greater the risk of losing some or all your original investment.  The longer you own a stock, however, the better you chances to reap the best return and lessen your risk.

In the last 200 years, the stock market has been a good place to grow an investment.  Since 1926, the stock market has returned an average of about 10 percent a year, but past performances is no guarantee of future earnings–we only have to look at last year to see that. But, as an eternal optimist, I still like investing in stocks.

Here are three guidelines to grow your nest egg:

1)    Invest early and invest regularly;

2)    Invest as much as you can, leaving it to compound, and

3)    Seek the highest return for the risk you are willing to bear.

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