The Power of Compounding: Why Time Matters in Investing

One of the questions we are frequently asked by clients is what compounding is and how it can benefit their investments. I thought it would be helpful to share some general information about this important concept and why it plays such a significant role in long-term investing.

One of the most powerful concepts in investing is something called compounding, often referred to as "earning returns on your returns."

In simple terms, compounding occurs when the growth on your investments begins generating its own growth. Rather than earning returns only on the money you initially invested, you also earn returns on the gains accumulated over time.

For example, if you invest $100,000 and earn a 7% return, your investment grows to $107,000 after one year. In the second year, you earn returns not just on the original $100,000, but on the full $107,000. Over time, this snowball effect can significantly increase the value of your investments.

The key ingredient that makes compounding so powerful is time (as shown in the chart above).

The longer your money remains invested, the greater the potential impact of compounding. This is why starting early and staying invested through market cycles can be so beneficial for long-term financial goals.

While market performance will vary from year to year, maintaining a disciplined investment strategy allows compounding to work in your favour over the long run.

If you have any questions about your investment plan or would like to discuss strategies to help you reach your financial goals, please don't hesitate to reach out.

The comments contained herein are a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. This blog was prepared by Alison Cannell, for the benefit of Alison Cannell, Financial Advisor with Cannell Wealth Management Inc., a registered trade name with Investia Financial Services Inc., and does not necessarily reflect the opinion of Investia Financial Services Inc. The information contained in this blog comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability.

The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any securities. Mutual Funds are offered through Investia Financial Services Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments.  Please read the Fund Fact sheet or prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.