To Smart Investors,
Nobody can deny that the stock market is a powerful tool for building wealth over time.
At the heart of this potential lies a fundamental concept: compounding interest.
Understanding and leveraging compounding can make the difference between fleeting gains and lasting financial success.
The Mathematics Behind Compounding
Compounding interest occurs when the returns on an investment are reinvested to generate additional earnings over time. This creates a snowball effect, where earnings produce more earnings.
Example: If you invest $10,000 at an annual return of 8% (the historical average of the S&P 500) and leave it untouched for 30 years, it grows to approximately $100,626. Without compounding, the simple interest would only amount to $34,000.
Warren Buffett: A Case Study in Compounding
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