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Power of compounding effect

Invest young and enjoy the power of compounding effect.

Why is this website named as Malaysia young investor? It is because of the importance of start investing young. Being young is a privilege, being young is an upper hand you can gain in accumulating wealth. In fact, the younger you realized the importance of investing and the younger you take action, the earlier you will reach financial independence.

This is because of the compounding effect. Compounding is basically the process to generate earning based on reinvested earning. For compounding effect to take place, one must reinvest the earning that they can get in previous year.
For instance, you have 1000 unit of stock ABC. Currently its share price is RM1. In Year 0, it gives you a dividend of RM80. So this is equals to an 8% ROR in year 0. Now, for compounding effect to take place, you have to reinvest this RM80 to buy 80 more unit of stock ABC again. The cycle is repeated. In Year 1, you have 1080 unit of stock ABC. You get a dividend of RM86.40, equals to 8% ROR. Instead of getting RM80, you now have RM86.40 this year. This reinvestment earning will keep growing as year past, in Year 2 – RM93.30, Year 3 – RM100.78, Year 4 – RM108.84 and so on. This is compounding effect.

For compounding effect to take place, you must also give it a time period to compound. The longer the duration, the more massive the compounding effect. For example, look at the graph below. Investor A start investing at the age of 21 with a capital of RM10k while Investor B start investing at the age of 30 with the same amount of capital too. Reaching age 60, we can see that the portfolio of Investor A is now worth two times more than Investor B! As the graph of age 21 shows, the increment in investment worth value increase slow and become very steep as time passed by. This is the power of compounding. As time passed by, the profit gained through earning reinvestment improves drastically.

So young boys and girls, or even if you are no longer young, don't procrastinate. Start investing now.

Need more statistics to convince you? Check these numbers out.

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