Compound Interest
Compound interest is growth earned on both your original capital and on the gains that capital has already produced. Each period’s return is calculated on a larger base than the last, which turns steady growth rates into surprisingly large numbers over long horizons.
The math
At 7 percent a year, 10,000 dollars becomes about 19,700 after 10 years, 38,700 after 20, and 76,100 after 30.
| After | Value | Gained that decade |
|---|---|---|
| 10 years | $19,700 | $9,700 |
| 20 years | $38,700 | $19,000 |
| 30 years | $76,100 | $37,400 |
The third decade earns nearly four times the first, on the same capital and the same rate.
Nothing changed except the size of the base being compounded. The last years do the heavy lifting, which is why quitting early is the most expensive decision in investing.
The trap
Underestimating small percentages that compound against you. A 1 percent annual drag (a fee, a recurring tax, a habitual trading cost) does not cost 1 percent of your outcome.
On the 30-year example above, dropping from 7 to 6 percent shrinks the final amount from about 76,100 to 57,400 dollars: a quarter of the end wealth gone to a “small” leak.
The move
Maximize the two inputs you control: time in the market and the leaks. Start positions you can hold for decades, reinvest dividends so they buy shares that produce their own dividends, and treat every recurring cost as a compounding enemy.
Before chasing an extra point of return, eliminate the guaranteed negative compounding you are already paying.