What is the Power of Compounding? – About, Specialism, and More
Power of Compounding is not extensive, but not for that reason, unimportant.
The success of a good investment is linking to the great Power of compounding.
In my presentation, I told you that the three pillars of a reasonable investment are saving, patience, and investment in value.
The first is in genetics, and I can do little from here to change a consumer profile.
What is the Specialism of Power of Compounding?
Maybe just one piece of advice, if you like to consume, only a good investment will guarantee you more consumption tomorrow.
The third, investment in value, will be the next blog posts theme, and I refer to them.
I only ask that you save 150 euros a month for 20 years, investing the accumulated savings (€ 1,800) at the end of the year.
From there four scenarios
- You use the bills to enhance the plumage of your quilt
- Go to the nearest bank, enter the amount each month and agree to a 3.5% profitability
- You invest in the stock market replicating the S&P 500 (average profitability of the last 17 years: 7.60%)
- You invest in value (for example, in Bestinver’s Bestinfond fund, whose historical return -17 years- is 17%)
The results of your decision after those 20 years
- 36,000 euros
- 53,000 euros
- 85,000 euros
- 274,000 euros
If the time horizon of the investment is extending to 30 years
- 54,000 euros
- 96,000 euros
- 204,000 euros
- 1,364,000 euros
Now let’s set a time horizon of about 25 years for retirement. After those 25 years, our 150 euros per month of savings will have turned into almost 300,000 euros.
We can, then, withdraw our money from the Stock Market, deposit it in a bank.
It agrees on a 3.5% profitability and withdraws 1,500 euros every month for twenty years, with a remainder of more than 60,000 euros after those twenty years.
And only for 150 euros a month and a dip in the waters of value.
What is this Compound Interest in Power of Compounding?
Think of a snowball that, as it goes down, sees how its volume does not stop growing.
That’s what will happen to your money if you leave it to compounding.
We have to think that the success of our investments depends on a single factor: profitability.
But we forget the other two significant factors; perseverance and patience if we apply not very high profitability to a modest flow of constant savings over time (constancy).
We will see that, after a long period (patience), the accumulated capital is reaching unsuspected levels.
What is the Main Key of Power of Compounding?
The key for a long-term investment to give us optimal results is in this simple equation (Constancy + Patience) x N.
Where N is the number of years that the investment must be allowed to act.
In our equity portfolio, the average annual return in the last eight years is around 14%.
Still, to make a future projection, we will be more conservative in our forecasts and assume a future average annual return of 12, 25%.
With this profitability, we will be able to double our invested capital every six years, as shown in the table below these lines.
The key is to plan the investment in the long term and maintain it because, in a long time, it is where the differences in obtaining results are marked.
In the right part of the table, we can see that to multiply by two the initial investment (x2) it takes six years, to multiply by 3 (x3) takes four more years.
To multiply by 4 (x4) it takes another two years, that is to say, It took us 12 years to bear the initial investment by 4.
However, in the next six years, in year 18, we have already multiplied by 8 (x8), and from there each year that passes, we multiply the initial capital by one or more times.
Another revealing fact is that in the first 24 years we earned the same, (€ 1,601,298), as in the last six years (€ 1,601,949), with the final capital accumulate in year 30 being € 3,203,247.
Important legal information and declarations
This material is intending to educate and not provide legal, tax, accounting, or investment advice.
Neither PNC Investments nor its affiliates and suppliers provide legal, tax, or accounting advice.
Affiliated PNC Investments companies, including PNC Bank, PNC Wealth Management and PNC Institutional Asset Management, may offer additional “recommended” articles and information.
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