Math Matters Principle 1
Compound growth is the growth rate from your original investment and also any interest, dividends, and capital gains that have accumulated over time. The miracle of compound growth is a snowball effect: growth generates growth which generate even more growth and continues to do so. Your money grows faster and faster as time goes on and the more money you have.
The Rule of 72
A related and helpful tool is the well-known “rule of 72.” This is a short cut for estimating how long it would take double your money. The formula divides 72 by the compound annual growth rate. For example, with a 10% compounded annual return, your money would double in 7.2 years
How long it takes for an investment strategy to double your money matters. The shorter the time period, the sooner the power of compounding kicks into high gear.
Achilles' Heel of Compounding: Losses
The principle of compound growth assumes a consistent rate of return with no losses. The reality is the markets don’t move in a straight line and there are periods of losses, especially of longer timeframes. If those losses are significant, they may weaken eventual compound returns, sometimes even setting a reset to a lower level.
Compounding is powerful, but it takes time. Mitigating losses during that time can improve the power of compounding.