Tuesday, 31 July 2012
Believe in the Power of Compounding.
Two friends, E and L are just out of college and have taken up jobs.
From day one, E sets aside $300 every month, which earns him 10 percent per annum. After 10 years, he stops as he has started a family.
L got married early and did not save anything for a long while. After 10 years, he began to set aside $300 every month earning him 10 percent per annum. He continued doing this for the next 30 years until he retired at the age of 60.
L's investment was $108,000, while E's was only $36,000.
When both retired, who have more money?
It would seem to be L as he has been saving for 30 years. In reality, it was E.
At 60, E got $1,051,212 while L got $621,787.
This is the power of compounding which investors normally forget.
L could not make up for the 10 years that E's money compounded at an annual rate of 10 percent per annum.
E is an early saver. L is a late saver.
Many investors ask whether they can build an investment portfolio with a small capital.
The answer is in order to grow big, you need to start small and stay invested. The longer you hold the better for you. Believe in the power of compounding.