Investing
3 Actions to Make Best Use of Compound Interest
21 April 2020
Compound interest is very powerful.
It is the interest you get on top of the previous principal + interest you already got.
Read also: My 5 Key Takeaway From Temasek Portfolio Value in 2020.
Here are 3 actions you can take to make the best use of compound interest:
Invest early – the earlier we invest, the more powerful the compounding effect becomes. By investing early, we will truly maximize the effects of compounding – so long as we stay invested for the long haul.
Re-invest your profits – remember than compound interests are interests on top of your original capital + your interests. So in an investment point of view, it is your original starting capital + all the profits you already made from the stock market. By re-investing them, you are making use of compound interests to the fullest as you are building your base capital.
Add more money – by adding more money to your portfolio, you are building your base capital. It will accelerate the impact of the compounding because the % return is built on a bigger base.
Rule of 72 gives you an idea of how many years it takes for your investment to double. Getting 20% a year, takes you 3.6 years (72/20) and getting 8% a year, takes you 9 years (72/8).
But remember, compound interest is good in theory. But if you lose money consistently on your investments or you cannot get a consistent rate of return over time, compound interest is useless.
—
This is Chris’s weekly take, which can found in VIM membership site at www.vimclub.sg.
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