Compounding Interest: The 8th Wonder Of The World
“Compounding interest is the eighth wonder of the world.” Albert Einstein
When should you start investing? Yesterday is one of the best answers we can think of. As Einstein stated in his quote, compounding interest can be extremely powerful for investors over time. Compounding interest essentially means “interest on interest,” and it’s why so many long-term investors have been successful.
“Yes, investing can be volatile, and periods like December 2018 can make it quite tough, but if you are saving for retirement and have potentially decades to go until retirement, one of the best things you can do during periods of market stress is nothing,” explained Senior Market Strategist Ryan Detrick. “By ‘nothing’ we mean you should stick to your financial plan.”
By dollar-cost averaging into a retirement plan through the ups and downs of markets and over a period of years and decades, your nest egg has significant growth potential thanks to—among other reasons—compound interest effect on the earnings.
Here’s a powerful example. Our LPL Chart of the day shows two hypothetical investments, both assuming an annual return of 8%. In the first scenario, an investor puts away $3,000 a year from the age of 21 until age 30, then stops. The second scenario assumes an investor starts to invest $3,000 a year from the age of 31 until age 70. Incredibly, the investor who invested only 10 years, but started 10 years earlier, has more money at age 70 (over $1 million!) than the investor who put money away for 40 years—simply because the investor started earlier and let compounding interest work its magic.
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.
This research material has been prepared by LPL Financial LLC.
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