Investment for Beginners - The Concept of Compound Interest
According to 'Merriam-Webster' dictionary, Compound Interest is an interest computed on the sum of the original principal and accrued interest.
By: Investam HK
Example #1: Vanguard 500 Index
Another example of the benefits of compounding is the popular Vanguard 500 Index fund (VFINX) held for the 20 years ending February 28, 2017.
A $10,000 investment on that February 28, 1997 day would have grown to a value of $42,650 at the end of the 20-year period. Assuming that fund distributions like dividends, interest or capital gains was reinvested back into the fund.
Without reinvesting the distributions, the value of the initial $10,000 investment would only have grown to $29,548 or 69% of the amount reinvestment.
Example #2: Apple stock
An investment of $10,000 in the stock of Apple (AAPL) on December 31, 1980 would have grown to $2,709,248 as of the market's close on February 28, 2017. This translates to an annual return of 16.75%, including the reinvestment of all dividends from the stock.
Apple started paying dividends in 2012. Even so, if those dividends hadn't been reinvested, the ending balance of this investment would've only been $2,247,949 or 83% of the amount invested.
You can also use compounding through the power of holding. You can check or compute how much capital fund you need to invest and grow in a certain year span without withdrawing.
A 25-year-old who wishes to accumulate $1 million by age 60 would need to invest $880.21 each month assuming a constant return of 5%.
A 35-year-old wishing to accumulate $1 million by age 60 would need to invest $1,679.23 each month using the same assumptions.
A 45-year-old would need to invest $3,741.27 each month to accumulate the same $1 million by age 60. That's almost 4 times the amount that the 25-year old needs. Starting early is especially helpful when saving for retirement, when putting aside a little bit early in your career can reap great benefits.
Investam HK Limited