Astonishing Effect of Compounding Growth

Compounding Growth

Most investors are aware of the power of compounding interest as the most powerful force of the universe as too many people put the quote to Albert Einstein’s mouth where he probably didn’t say it at all. However, most people would not mind whoever said it. It is indeed a powerful thing we all recognize.

We all know and understand its concept but I really do not know how many of us enjoying its effect on our invested capital?  There are many stories tied up to that concept which has motivated us to do investment. Those stories possibly have propelled us to do investment while we were still young. Over the years, have our capital compounded accordingly?

Most Essential Elements

There are 2 most essential elements if we want to experience compounding effect on our investment. First is consistent profit and the second is over a long period of time. And the first part is critical, without which, the second part is meaningless.

If we can gain big profit some of the times, but do experience losses sometimes as well, we are not able to have compounding effect on our investment.  Nick Berry of DataGenetics showed a very good example as in Table A.

Table A
Table A

All of the investors (A-F) experienced profit and losses; some with smaller amount while some larger amount. Eventually after 7 years, none among them, except F, experienced compounding growth as shown in Graph A.

Graph A
Graph A

In another example, Berry showed 2 investors where their performances outwardly look very similar (See Illustration A at below). The difference is only in the magnitude when they win and loss. One wins smaller (+10%) but also losses smaller (10%) while the other one wins big (+25%) but also losses big (25%).  Both of them are losers, however, the worst loser is the second one.

Illustration A
Illustration A

The key lesson for us as investors is; it is not how much we gain in our investment (which is the thrilling effect most investors are looking for), it is the losses that matter the most. If we can avoid losses, even if the profit seems small initially (very boring investment experience), it will yield its result exponentially through compounding growth later on through a longer period of time (you will have experienced the astonishing effect).

Table B
Table B

Look at Table B, for example, someone started with RM 100,000 capital with only a 15% consistent profit yearly. Eventually he experienced a total of RM 1.6 million compounding growth effect after 20 years. Graph B shows the exciting growth pattern.

Graph B
Graph B

However it is still back to Table B that shows the essence of the astonishing effect. Under column H, we can see the exponential increase in yearly profit. The difference between year 2 and year 1 is RM 2,250.00. But between year 10 and year 9, it is RM 6,882.80. And on year 20 and 19 is astonishing RM 27,844.77 … just for one year difference.  In order words, it took 3 years to increase the amount of RM 10,000 from year 1 to year 3. But it took only 1 year to increase the same RM 10,000 each at year 11 to year 13. Furthermore, the astonishing fact is that it takes merely 1 year to increase RM 20,000 from year 18 and 17. In short, the astonishing effect will be the longer it is, not only the greater, but also the faster it will become. This is the most exciting essence of the compounding effect.

Compounding Growth on EPF

As Malaysian employees, we are very thankful that we have the employment laws enforce us to contribute a retirement fund called Employment Providence (EPF) Fund on monthly basis until our retirement age. When we started to work in our younger days, we felt the pain after our salaries were deducted such a large amount away. However, readers who are near to retirement age now would have experienced this astonishing compounding effect in our EPF account.

EPF
Malaysia Employee Providence Fund House provided us 6% annual dividend for the past 30-40 years

Unfortunately, according to statistic, those employees who do not have financial education took out the fund right after their retirement and consume it within 3-5 years in various expenditures.  It shows the importance of proper financial education in the aspect of compounding interest growth.

Employee Providence Fund House consistently gave us a annual dividend of around 6% for the past 30-40 years to make us realize the large amount of capital now.  If we are able to learn a consistent profit of 10 -15% annual profit, the astonishing effect will be even much more marvelous if we have our fund taken out from our EPF account after retirement age.

This consistent profit income is easily realized through investment from mutual fund via Fundsupermart.  This has been proven not only by me alone but by one of my students who attended my training years ago. She has consistently been earning easily 10% yearly profit regardless of Malaysia market condition, because in Fundsupermart, we can invest globally.  Even in 2017, Malaysia market is one of the worst performing markets in Asia. But other parts of the world economy are growing rapidly and our team has been enjoying those rides currently.

Consistent Profit as Investment Essential

If you have not been earning profit on a consistent basis after a year, you should quit whatever vehicle you are using to do investment, and consider joining us in Fundsupermart.  Because missing one year of growth, even if you break even, not losing any capital, you are actually losing out compounding growth of 1 year time value.

Take a look at the online training course in my webpage (if you know Chinese, just sign it up), google search and study Fundsupermart.com.my website or similar multiple mutual fund houses carrier platform if you are from  other countries. If you join us,  you will be on your way to astonishing compounding growth. But the astonishing effect will only come after many years though, so just take patient and hang on there. The key is so long as you earn consistent profit on a yearly basis, you will be there.

See you at the top, are you coming?

 

 

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