Compounding is hard to imagine a concept but if used effectively can create enormous wealth over a long period of time, with very little investment
Compounding is the only reason you should be investing. As human begins we aren’t very good at intuitively understanding the concept of compounding over long durations. It’s hard for us to comprehend how compounding can lead to extremely large numbers when repeated consistently over a large period of time. Our brains are not wired to understand exponential growth.
In simple math it plays out like this:
6 + 6 + 6 = 18
6 * 6 * 6 = 216 (this is compounding and exponential growth)
Compounding enables your investment to grow faster towards the later stages of the investment cycle than it does at the beginning. Take this, for example, consider you are able to achieve 13% yearly returns (this is the rate at which the Nifty and Indian stock market has grown over the last 20 years), your money would double itself every 5.5 years. So in 22 years, you would have multiplied your money four times, once 5.5 years, another 5.5 years later, and then again and once again at the end of another 5.5 years.
What would be your investment amount if you had invested Rs 10 Lakhs at the beginning and compounded it at 13% every year for the next 20 years?
It would be 1.33 crores.
Magical isn’t it!
To conclude…
Small, consistent investments over a very long-term period. Having a bulk of investments in the best performing asset class like stocks & real estate. Not hurting the process of compounding by incurring frequent losses.