I started serious Investing Journey in Jan 2000 to create wealth through long-term investing and short-term trading; but as from April 2013 my Journey in Investing has changed to create Retirement Income for Life till 85 years old in 2041 for two persons over market cycles of Bull and Bear.

Since 2017 after retiring from full-time job as employee; I am moving towards Investing Nirvana - Freehold Investment Income for Life investing strategy where 100% of investment income from portfolio investment is cashed out to support household expenses i.e. not a single cent of re-investing!

It is 57% (2017 to Aug 2022) to the Land of Investing Nirvana - Freehold Income for Life!


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This blog is authored by an old multi-bagger blue chips stock picker uncle from HDB heartland!

"The market is not your mother. It consists of tough men and women who look for ways to take money away from you instead of pouring milk into your mouth." - Dr. Alexander Elder

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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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