The Eight Wonder of the World: Compound Interest
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” ―Albert Einstein
I’m currently reading the book Benjamin Graham and the Power of Growth Stocks – Lost Growth Stock Strategies from the Father of Value Investing written by Frederick K. Martin.
In chapter two I read the following paragraph:
“A quick scan of the compound interest tables yields a very interesting answer. (Compound interest tables should be part of every investor’s library, right next to your copy of Graham’s The Intelligent Investor and Security Analysis, as well as The Selected Essays of Warren Buffett: Lessons for Corporate America and, we hope, this book.)”
Reading this paragraph I picked up the three words ― compound interest tables ― and decided to make my own table, and add this to my own investor library.
Click on the image below to download.
The Power of Compound Interest
In one section of the book about the power of compound interest the author writes:
“Compound interest has often been dubbed ‘the eight wonder of the world.’ It is the interest paid on interest from previous periods as well as on the principal. Though small at first, the additional returns can become substantial over time. An investment of $100, if compounded over time at a rate of 10 percent, would grow to $260 over 10 years, $673 over 20 years, and $11,730 over 50 years.
Let’s look at the difference that compound interest can have over a lifetime of investing. Since the average investor has an investment lifetime of approximately 50 years, let’s look at the difference that compound interest can make over long periods of time. Let’s begin by examining shorter periods.
Investor A, B and C begin their investment foray with $100,000 each. Investor A earns 5 percent per year compounded, Investor B earns 7 percent per year compounded, and Investor C earns 9 percent per year compounded. For most investors, these differences in performance do not seem that significant. Indeed, after five years, Investor A has $127,628, Investor B has $140,255, and Investor C has 153,862. Investor C has less than 10 percent more than Investor B and about 20 percent more than Investor A.
The spread begins to grow over time. After 10 years, Investor C has $236,736, Investor B has $196,715, and Investor A has $162,889. Investor C now has 45 percent more assets than Investor A and 20 percent more than Investor B. After 20 years, Investor C now has $560,441, Investor B has $386,968, and Investor A has $265,330. Even though Investors A and B have made nice profits over the 20 years, Investor C has 45 percent more assets than Investor B and more than twice the assets of Investor A.
After 50 years, the differences are staggering. Investor C (9 percent per year) is now worth $7,435,752. Investor B (7 percent) is worth $2,945,703, and Investor A (5 percent) is worth $1,146,740. Investor C is worth more than 2.5 times as much as Investor B and nearly 7 times as much as Investor A.
…you can see the importance that a couple of percentage points can make over the long term. Seemingly small annual differences in investment returns can produce extreme differences in investment results over long periods of time.”