Lesson 2: The power of compounding (and the need to start to invest early)

If an investor can generate a 15% compounded return on his/her investment, he/she can double his capital every 5 years.  I like to use 15% as the rate of return (ROI) because I believe it is achievable if the investor adopts the right strategy.  I will share in a later article my investment strategy which I hope would generate more than 15% annual compounded return for me.

I believe most of you could afford to set aside $10k for investment.  Let us for time being ignore the effect of inflation to keep things simple as the ROI of 15% is significantly higher than the average inflation rate for Singapore (2009 - 06%, 2010 – 2.8%, 2011 – 5.3%, 2012 – 4.5%, 2013 – 2.4%), and hence will not reduce the net present value of your future money very significantly.  The table below shows how your capital will grow over the next 40 years.  At the end of Year 10, 20, 30 and 40 your capital would have grown to $40.6K, $163.7K, $662.1K and $2.679M, respectively.  Though $40.6K may not make much difference to you, $662.1K and $2.679M are certainly quite significant compared to what you could possibly earn from a salaried job and all these can be achieved with an initial capital of only $10k.  The effect of compounding can be felt only after a good 10 or 20 years; hence, it is important that one starts to invest early.  If you could set aside $100k to invest today, with an ROI of 15%, you would have $1.637M in 20 years’ time and $6.621M in 30 years’ time.

 

Allow me to digress a little.  The above suggests that if you have to take a mortgage loan to purchase a property, you should try to stretch the repayment period as long as possible to enjoy the low housing loan interest and use whatever balanced fund you could set aside for investment to grow your wealth.  I may elaborate more on housing loans and other loans in a separate article or you could simply Google for more information.