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Mind Boggling- The Power of Compounding


I had spent some time while on the train to read this book called "The Informed Investor" by Frank Armstrong the third. While I have not finished reading this book yet, it has provided me with a lot insights.

The most illuminating example in the book is that of the power of compounding interest. If you have a child, you need to take note of this. For child A, the parents invest for the future of the child by taking up unit trust/mutual funds that pays an average of 10% interest per annum. If the parents pay an annual amount of $1000 for the next 9 years. The parents make a net investment amount of $10,000 spread over 10 years. At the end of 10 years, this amount will have compounded to $15,937.42(you can duplicate this by using your excel sheet and keying in =FV(0.1,10,1000) ). If the parents do nothing to this amount and we assume that they let it continue investing in this investment vehicle, when the child reaches 65 years old, he or she will have slightly over a staggering $3 million.

The better part is this: Assume that another set of parents B who also worries for the child B but delays it for just 10 years later and invest in the future of the child just like the parents of child A. At the end of the tenth year of investment, the child would be 20 years old and child B will have the same amount of principal, $15,937.42. But with 10 years less compounding, child B will have only a little over $1 million at the age of 65 (you can check this using the same excel sheet by keying in =FV(0.1, 45, 0, 15937.42) ). That is a staggering $2 million less.

The best part? Even if child B, who is investment savvy at age 20 for the sake of the argument, invest $1000 every year until he or she reaches the age of 65, young adult B will still have more than $1 million LESS than child A who does nothing (check it out by entering =FV(0.1, 45, 1000, 15937.42) and you will get about $1.8million).

So what are you waiting for?

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The information contained in this blog is prepared from data believed to be correct and reliable at the time of publication of this report. The authors do not make any guarantee or representation as to the adequacy, accuracy, completeness, reliability of the information contained herein. Neither the authors or any affiliates or related persons shall be liable for any consequences (direct or indirect losses, loss of profits and damages) of any
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