This literally just came to mind about… seven seconds ago as I am sitting at my laptop. What a better concept to illustrate right!? Everyone understands the power of compounded returns, but hey, a little visualization every once and a while can’t hurt.
The concept is such that if you start with let’s say $1,000 and it grows 10% a year, year over year, for 10 years, you will have xxxx dollars by the end. Some may think that $1,000 x 10% for 10 years really isn’t much money at all, because $100 each year won’t do me much down the road. And, as we know this is inaccurate, because the power of compounding money is well… compounding the money! It isn’t $1000 x 10% x 10 years, no. It is $1000 x 10% for the first year, or $1,100 with growth, then $1,100 x 10% for the second year, and so and so forth.
So, let’s take our $1,000 and compound it over 10 years at 10% a year:
We end up with $2,593.74 which is nearly 160% return on our money over those 10 years. If you took that same $1,000 and compounded it by 20% for 10 years, you end up with $6,191.74, which is about a 620% return!
Some of the best money managers in the world have done 2x% over 20-30 years. So let’s say for simplicity sake we took our $1,000 and compounded it at 25% over 30 years. What do we get at the end of the road? $646,234.85!!
Funny story here to close this up, my Stepdad was best friend with Warren Buffet’s now accountant growing up. As kids my Stepdad would play with his best friend and Warren Buffet. When he turned 16 my Stepdad was given 100 shares of Berkshire Hathway (BRKA) as a present which at the time was only worth a few hundred dollars. He sold it for a few hundred % return a few years later, and obviously wasn’t aware at the time that there was still a lot more compounding to go! Those same 100 shares today are now worth nearly $11 million dollars. Now that’s the power of compounding investment returns.