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Power Of Compounding in Stock Market

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  • August 4, 2014
Compounding: 8th wonder of the world?

India is a country where everyone wants a little extra for their money and we Indians are obsessed with savings. Well rightly so, but then what to do with our savings, do we know?

Power of compounding in stock market

Let’s check what happens when you invest your savings at 4%, 9%, 14% and 20%.  Let’s say you save Rs 100 each year and invest them at the above rates. The table shows the cumulative amount at the end of each period at different investment rates.

Cumulative amount at the end of each period at different investment rates Compound - Power Of Compounding in Stock Market

Do the results surprise you? No, let’s check the following graph and table to see the effect of compounding on your wealth.

Also Read : Fixed Deposit v/s Equities – Which is better?

Effect of compounding on your wealth - Power Of Compounding in Stock Market

Power of Compounding - Power Of Compounding in Stock Market

The ratios and multiplier simply show the factor by which you would be richer at the end of each 5-yr period. So after 30 years, investments at 20% compared to 4% would be worth 24 times. Warren Buffet, a famous investor is one of the world’s top 5 richest men and his rate of compounding is around 20% (in dollar terms). If you had invested in Sensex since 1978 then excluding dividends you would have been around the 14% mark. The color of graph will decide the ratio you end up with, which color do you like?

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