What is Compounding?
Updated: Feb 23, 2022
Hello to the new blog subscribers! Thanks for being here. One of you asked me this question, so I thought I'd blog about it--thanks!
When talking about investing, ‘Compounding’ means that your money, when invested, can make more and more money over time.
Here’s an example.
The S&P 500 has historically increased in value an average of about 10% a year since 1928.
$100 dollars invested in the stocks that would become the S&P 500, back in 1928, would be worth an estimated $592,868.15 in 2020. *
Compounding means that as the money invested increases in value over time, more money is available as a basis for the investment, so the effects of the increasing value COMPOUNDS, or gets larger and larger.
In order to benefit from ‘the magic of compounding’ it’s important to
Start investing, using money you won’t need for a few years
Stay invested! Stay focused on long term (5-10 years or more) results.
Will talk more about Time Value of Money in another blog, but feel free to research Compounding in the meantime.
Does what I’ve written here make sense? Drop a line below and let me know, and thanks for reading this!
*Source for the 1928-2020 data analysis: Aswath Damodaran, NYU Professor
(This spreadsheet could be confusing, but if you look at the second column, you’ll see historic percentage returns of the S&P 500. If you look at the 5th column, you’ll see what $100 compounds into--megabucks! of course, past performance is no guarantee of future results, and investing always comes with the risk that you can lose money. I have to say that, and it's true! but if you're ready to get in the game and see for yourself, and if you haven't already, click HERE to join the $5 waitlist.)
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