Written by Brent Ford
Albert Einstein reportedly said, “The most powerful force in the universe is not gravity, but compounding returns.” It’s unlikely he actually uttered those exact words, but it makes a great point — a point that investors should revisit in both good times and bad.
“Compounding returns” means an investor is earning a return on the original investment and is earning a return on the returns. To illustrate the power of compounding, let’s think about two people, Maria and Harry, both 20 year-old-college students with part-time jobs. After taking a finance course, Maria decides to save $50 per week and invest it in the stock market. She sets up an automatic deposit into a stock fund* that tracks the returns of the S&P 500. Easy peasy — set it and forget it! Harry did not take that finance course and just goes on about his life.
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