• Arne

Planting wealth: exponential growth and the power of compounding

The impact of exponential growth is extreme. Unfortunately, most people miss the cognitive capabilities to understand the actual impact. In investing, exponential growth leads to compounding interest which is the ultimate key to your financial success.

"Flatten the curve" is a sentence that was equally shared around the world by most politicians when explaining the risk of exponential growth in the Corona pandemic. In case of a pandemic exponential growth is something threatening, because it can quickly cause a whole health system to collapse. Contrarily, in investing, exponential growth is something very positive. It allows to build up a great wealth only by being patient.

Let us do the math together:

Say from today on you start investing 200€ per month in a broadly diversified stock index. This stock index provide you an average right of 8% p.a., which is the long-term historic average rate of return according to Jeremy Siegel. After 30 years you will have earned more than 290,000€. On the other hand, putting 200€ per month on a savings account with nearly zero interest p.a. you would end up with only 72,000€. The difference of more than 210,000€ is not coming out of nowhere but thanks to the power of compounding. The stock market does the work for you.

After 50 years, the difference is even more extreme; by investing in the stock market you would end up with almost 1,500,000€ compared to only 120,000€ on your savings account.

Just bear in mind: the power of compounding can only work for the long-term investor. So my advice: start investing as early as possible and hold your investments as long as possible. Sometimes it is hard to be patient but it is definitely worth waiting!