Compounding interest growth

Also known as exponential growth - is somehow difficult for the human mind to grasp. However, understanding it is the wellspring of successful Investing

Compounding can work to our advantage as our savings and investments grow over time -- or against us if we’re paying off debt

Let’s go back to basics. Investing is simply putting a sum of money away for a period of time with a view to receiving back significantly more money in real terms, in the future. Success as an investor is a function of two things:

i. Our net investment return over time;

ii. The length of time we remain invested

Almost everyone focuses more on the rate of return than on the length of time for which their capital will be invested

“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”_ Albert Einstein

To benefit from compound growth, it is essential to think about both factors – our ability to change the investment time period is far greater than our ability to change the long-term rate of return

The power of long-term compounding, and the fact that it is counterintuitive, are the heart of why some investors become very wealthy over time – and most do not

Compounding in trading; To sum up, compounding a trading account is a money management technique that lets us take the money we have made in profit and re-invest it in more weight. Over time, we will build up our trading account capital in an exponential and highly profitable way

Compounding refers to the reinvestment of earnings at the same rate of return to constantly grow the principal amount over time. However, the power of compounding works in many areas of our lives!

Take a family for instance that have 4 children and 11 grandchildren. It took just under 20 years to get the 4 children. In another 20 years, 11 grandchildren (and growing) In 20 more years, they could have between 20 and 40 great grandchildren; and maybe 100 great-great grandchildren 20 years later. This is the law of compounding at work!

Why is compound interest so powerful?

The number 1 thing that makes Compounding interest so powerful is "the time that we apply." Just like in most things, it takes time to end up achieving some success no matter what we’re working towards

Successful investing takes time, discipline and patience. No matter the talents or efforts, "some things just takes time." You can’t produce a baby in one month by getting nine women pregnant -Warren Buffet

Compounding can create a snowball effect, as the original investments plus the income earned from those investments grow together over time. It makes a sum of money grow at a faster rate than simple interest, because in addition to earning returns on the money we invest, we also earn returns on those returns at the end of every compounding period, which could be daily, monthly, quarterly or annually

The more time, the more growth potential; If we saved $50 a month for 10 years and never invested it or earned any interest on it, we’d have $6,000 after 10 years. But if we invested $50 a month for 10 years and earned 8% each year on our investment, we would end up with about $9,150. In other words, we’d have more money by Compounding

There are two things that can influence the rate at which money compounds in an account;

• The first is the length of time that the money can be left to compound. The longer the money can sit uninterrupted, the bigger the returns can be
• The second is the interest rate earned on the investment. A higher interest rate will contribute to a stronger rate of compounding

The basic rule of thumb for this is that the higher the number of compounding periods, the greater amount of compound interest

Compounding interest is a key concept in understanding “wealth building.” It can transform the savings of an investor if it is understood and taken advantage of early

Someone sitting in the shade today because someone planted a tree a long time ago -Warren Buffet

We don’t have to know all the mathematical equations behind it to grasp the basic idea. An investment left untouched for a period of decades can add up to a large sum, even if we never invest another dime

The key is to start now and contribute what you can! It may seem like it’s not worth it, but even small contributions per month add up over time

Time is our best friend and the one thing that makes compound interest so effective. Saving now and starting early will pay dividends in our future and help us accumulate extra money. That’s the power of compound interest and why it pays to start growing the wealth now

Lessons of compound interest

i. Patience; Developing patience is the most important factor when it comes to using the principle of compound interest. Most of us amateur traders make some calculations and then get too excited about where we could be in 10, 20 or 50 trades. But back in reality we get frustrated because our $2,000 account is not producing the returns we are after. "90% of our trading journey will be slow and boring” because compound interest only really kicks in once our trading account reaches a certain size

Thus, most traders will never get there because they give up too early and change trading systems, hoping to find something that will generate greater returns faster

Can we accept to make little money for the next few years in exchange for a potentially high reward at some point far in the future?

ii. Consistency; Once we have understood that we need to be patient, it then comes down to applying consistency to our performance. Everything significant that has ever been achieved is based on the principle of consistency!

The tallest building in the world started with one brick and by consistently laying brick upon brick

Arnold Schwarzenegger became the best bodybuilder of all times because he consistently worked out every single day, building his body little by little

The Fortune500 companies got to the top by making customers happy – one at a time – and by continuously making small improvements

As a trader, we have to bring our best game every single day. And even if it looks as if our trading account will never amount to anything meaningful, we keep in mind that the principle of compound interest is irrefutable and it works every single time without exception – it’s a law of nature

It is remarkable how much Long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent -Charlie Munger

Trading is a BUSINESS - Treat it as such!!