In episode 15 on the Wilson Wealth Management YouTube channel, we examine compound returns and its significant impact on wealth accumulation and investing success over time.
We indirectly looked at this concept in episode 14 on time horizons. How your available time to reach a financial objective will impact your funding requirements and the level of investment risk that must be assumed.
The time you allow your money to grow is crucial to wealth accumulation. In fact, over longer time periods, it is the income earned on previous income earned that is the bulk of your wealth growth. Not what you actually contributed to the investment account. Perhaps hard to believe. But, as we shall see, quite true.
Understanding the “power of compounding” is crucial for investors. In this episode, we look at:
What is simple return?
What is compound return? How does it differ from simple returns? Using an example from the world of Harry Potter.
What are the keys to maximizing your use of compounding in your own portfolios?
What are the three interrelated variables in compound growth? We drill a little deeper into how time horizon, risk, and funding impact each other.
What are the two biggest drags on your ability to build your wealth?
We finish our analysis with comparison of the Ant and the Grasshopper. Sadly, not the Aesop’s Fable. Instead, a real world example of compound returns in action.
If you wish to read a bit more on compound returns, I recommend reviewing “Compound Returns”, “Compound Return Investment Lessons”, and the “Real Power of Compound Returns”.
Hopefully, you will see the value in beginning your investing program early in life. Utilizing tax-free and tax-deferred investment accounts. And working to minimize your investment costs. So that your capital can compound your benefit, not grow in accounts of your bank, advisor, or government.
