Getting Rich by using Compounding Effect – Investometry

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“Compounding is the 8th wonder of the world”

– Warren Buffett

Ever wondered why Warren gives so much of importance to the compounding effect? Let me take you through what is compounding and how you can get rich by using the compounding effect.

What is Compounding?

Compounding is a way through which small investments grow to a massive amount of wealth in the long run. It is a very powerful concept and the reason behind is that it is similar to a multiplier effect as the return which is earned by an investment is again re-invested till maturity. In the short run, compounding effect does not seem very attractive but if you look at the bigger picture compounding effect is fascinating. Let me show you the power of compounding by an example.

Power of compounding

Let’s say you invest Rs. 1 for long term say 25 years. If you invest with an aim to achieve an average of 15% return per year then let’s check how the compounding works.

No. of years Net worth (INR)
1 1.15
5 2
10 4.04
15 8.13
20 16.36
25 33

Of course, you won’t invest just a rupee, this was just taken as an example for an easy understanding.

Also Read on FinMedium:  Anchoring & Adjustment in the Stock Market

Let’s take a different scenario in which you have a capital of Rs. 10,000 and every year you invest Rs. 2000 and do the compounding for 25 years with a CAGR of 15%. Let’s check out how much your investment will grow.

No. of years Net worth (INR)
5 33,600
10 60,760
15 1,28,950
20 2,66,110
25 5,41,980

This is how the compounding effect benifits you in the long run. In stock market, you don’t earn a constant return but atleast if you take an average of 15% you can get wealthy by investing regularly and also in the right stocks. Some stocks might give you an extra ordinary return like a multibagger, then your net worth will increase even more.

In investing in stock market, you will need a lot of patience and courage. Patience to hold your stocks for years and courage to invest more when the stock price falls. Usually out of panic many people sell their stocks but instead of selling you should buy more as it gives an opportunity to buy at a discounted price.

“You can see all 7 wonders of the world by using the 8th wonder of the world which is Compounding.”

– Anonymous

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Meet Mehta
21 | Small & Mid Cap Investor | CFA L1 candidate | Blogger | Reader | Engineer | Life-Long Learner
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