Investor Education > Investment Basics > Reinvesting Distributions
COMPOUNDING RETURNS
What would be so special for Albert Einstein to describe it as the “most powerful force in the universe” and for John D Rockefeller to call it the 8th wonder of the world? Compound interest may take us all back to high school math but it is a powerful concept when you are investing.
Simple Vs Compound interest
To refresh our memory, simple interest is to simply calculate interest on the original investment amount. Compound interest is earning interest on your interest. The first interest is calculated on the original investment amount. The second interest payment is paid on both the original investment and the previously earned interest.
|
|
COMPOUND INTEREST |
SIMPLE INTEREST |
|
|
Investment value |
8% interest |
Investment value |
8% |
|
Year 1 |
$10,000 |
$800 |
$10,000 |
$800 |
|
Year 2 |
$10,800 |
$864 |
$10,000 |
$800 |
|
Year 3 |
$11,664 |
$933 |
$10,000 |
$800 |
|
Year 4 |
$12,597 |
$1,008 |
$10,000 |
$800 |
|
Year 5 |
$13,605 |
$1,088 |
$10,000 |
$800 |
|
Year 6 |
$14,693 |
$1,175 |
$10,000 |
$800 |
|
Year 7 |
$15,869 |
$1,269 |
$10,000 |
$800 |
|
Year 8 |
$17,138 |
$1,371 |
$10,000 |
$800 |
|
Year 9 |
$18,509 |
$1,481 |
$10,000 |
$800 |
|
Year 10 |
$19,990 |
$1,599 |
$10,000 |
$800 |
|
Year 11 |
$21,589 |
$1,727 |
$10,000 |
$800 |
|
Year 12 |
$23,316 |
$1,865 |
$10,000 |
$800 |
|
Year 13 |
$25,182 |
$2,015 |
$10,000 |
$800 |
|
Year 14 |
$27,196 |
$2,176 |
$10,000 |
$800 |
|
Year 15 |
$29,372 |
$2,350 |
$10,000 |
$800 |
|
Year 16 |
$31,722 |
$2,538 |
$10,000 |
$800 |
|
Year 17 |
$34,259 |
$2,741 |
$10,000 |
$800 |
|
Year 18 |
$37,000 |
$2,960 |
$10,000 |
$800 |
|
Year 19 |
$39,960 |
$3,197 |
$10,000 |
$800 |
|
Year 20 |
$43,157 |
$3,453 |
$10,000 |
$800 |
|
Total Value |
$46,610 |
$26,000 |
A simple strategy to harness the power of compound interest is by reinvesting your dividend or distributions you earn from your shares or managed funds. It gives you the potential to compound your returns. In conjunction with “time in the market”, the longer you reinvest, the more effective it can be.