The Power of Compound Interest – 3 Reasons

by | Nov 4, 2023

 

This is a simple phenomenon.

It requires little work.

But demands full implementation and your patience.

1 Year – This is pointless

2 Years – Are you kidding me?

3 Years – This can’t sustain me

4 Years – hold on!

5 Years – This is amazing passive income!

6 Years – Now I see why this was a patience game!

Its impact on trading is profound.

It will serve you as a cornerstone to build your wealth and achieve your long-term financial goals.

Once you understand the mechanics of compound interest, you’ll be set…

Let’s get into the reasons!

  1. Exponential Growth

Compound interest is nothing more than a snowball effect.

Roll a ball of snow down a mountain of ice, and it will magnify bigger and bigger.

Same with trading.

Start off with your account and you’ll find it will magnify your wealth by reinvesting earnings to generate further returns.

Consider a hypothetical scenario where an individual invests R100,000 in the stock market with an annual return of 20%.

In the first year, the investment grows by R20,000, resulting in a total of $120,000.

Instead of withdrawing the earnings, you’ll reinvest them for the subsequent year.

In the second year, the 20% return is not just on the initial R100,000 but on the accumulated R120,000.

This will then result in resulting in R24,000 of growth. This will now take your portfolio to R144,000.

Over time, this compounding effect creates a substantial surge in wealth, transforming the initial investment into a much larger sum.

Let’s look at the 7th year…

 

A = P × (1 + r)^n

 

Where:

 

A is the final amount after n years.

P is the initial principal amount (R100,000).

r is the annual interest rate (20% in this example).

n is the number of years.

For the 7th year:

 

A = R100,000 × (1 + 0.20)^6

 

Calculating this:

 

A = R100,000 × (1.20)^6

A ≈ R100,000 × 3.20736

A ≈ R320,736

For instance, if the same investment continues for just 7 years, the compounding effect could turn R100,000 into R320,736.

And then it just accelerates like you can’t believe.

For the 15th year:

A = R100,000 × (1 + 0.20)^14

 

Calculating this:

 

A = R100,000 × (1.20)^14

A ≈ R100,000 × 16.857901

A ≈ R1,685,790.1

 

NOTE: Imagine you started with R500,000 or R1,000,000? Then we are really talking acceleration with growth with your portfolio…

That’s why it’s important to deposit into your trading account every month or couple of months.

 

  1. Inflation Protection

Inflation erodes the purchasing power of money over time.

You’ve seen it with how expensive things have become and how salaries have remained the dame. And I’m sure you’re up to date with your Economic Calendar when the CPI numbers and interest rates came out.

However, compound interest acts as a shield against inflation’s corrosive effects.

Luckily, with compounding we can diminish the effects of inflation.

Because our returns will outpace the inflation rate.

Let’s say the inflation averages at 3% annually.

An investment earning a 20% return sees a 17% real return, considering the 3% inflation.

Over time, this seemingly modest 17% real return compounds and significantly outpaces the inflation rate.

This will help preserve and enhance the investor’s purchasing power.

  1. Financial Security

Trading and investing is one thing you can have control over.

You can control your portfolio size, risk, volume traded etc… You can also choose to analyse and set up your charts on different markets with different screeners

You can’t be fired or retrenched. And it’s something you will be able to do past the retirement age.

So it does provide financial security.

But it also requires FULL responsibility for your actions.

Also, it’s not a monthly salary you’ll get.

You won’t get yearly bonuses or retirement benefits.

Some months will be down.

Some months will be up.

You might even have a few losing years – in the process…

This is ALL Normal.

As long as you’re following the rules, criteria and keeping disciplined with full integration of your trading – YOU WILL MAKE IT!.

Trade well, live free.

Timon Rossolimos
Founder, MATI Trader

 

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Trade well, live free.

Timon Rossolimos

Founder, MATI Trader

 

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