As from April 2013 my Journey in Investing is to create Retirement Income for Life till 85 years old in 2041 for two persons over market cycles of Bull and Bear.

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Saturday, 11 December 2010

Compound Interest is not the same as Compound Returns

"Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it."  - Albert Einstein

Compound Interests and Compound Returns
 
The two terms are often mistaken as the same by investors. Savers earn compound interests e.g. 8% fixed deposits with auto-renewal. Compounding in financial instruments like fixed deposits means interest is not only earned on a principal sum but also on any accumulated interest. That concept of compounding effect in saving must not be applied to investing in stocks market.
 
The returns on your portfolio of stocks are subjected to the volatility of the stock market so your compound returns may not necessary be the "eight wonder of the world". You may be even wondering why you are getting negative returns after XX years?
 
I illustrate the examples in the table below:

1 comment:

  1. hey.. good post.. the only way to achieve compound returns for stocks is to re-invest dividends, etc

    ReplyDelete

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