Compound Interest – The Eighth Wonder of the World

Often attributed to Albert Einstein, there is much conjecture over who originally made this observation, as there have been many examples of it published even before Einstein came to prominence.   Regardless of whether he initiated the philosophy there is little doubt that the great mathematician would have agreed with the sentiment.

There is also little doubt that the wonder of compound interest continues to be a force in terms of accumulating wealth even in our modern and volatile investment environment.

If you are not aware, compounding is the strategy of using your earnings from an investment, such as dividends from share and managed fund investments, to acquire additional units of your investment, thereby building a larger capital base – which can then be expected to generate even more income.

A client of our firm recently shared the results of his efforts. In 1993 he acquired 530 shares in CBA. In 1997 he purchased another 300 shares with additional capital of his own. Apart from those purchases he has utilised all dividends received to acquire additional shares up until 2013 – 20 years of compounding.

His parcel of CBA shares now sits at 2,575 – more than triple the number he purchased directly. The shares have experienced many fluctuations in their value during this period as markets took their effect however this often provided opportunity to acquire shares at well below their current value.

Our client, who is now retired and so has different investment objectives, now receives his dividends as a cash distribution to assist with his living expenses. His annual dividend exceeds the initial outlay he made in 1993 and 1997. The current capital value is more than 25 times his own investment.

Investing can be complex but often the most tried and tested strategies, over appropriate periods of time, offer the least complicated solutions. Forward this message to family and friends to continue the wonder of compounding.