The value of investments and any income from them can fall and you may get back less than you invested.

Understanding compounding – and what it can do for your investment

Share

“My wealth has come from a combination of living in America, some lucky genes and compound interest” - Warren Buffett.

Compound interest is simply interest on interest, but its impact is incredibly powerful: Albert Einstein reportedly described it as the eighth wonder of the world.

A simple example is a £1,000 investment paying 5% interest. After one year you would have £1,050. Then in year two, you would get 5% of £1,050, which is £52.50, totalling £1,102.50.

In year three you would get 5% of £1,102.50 which is £55.13, totalling £1,157.63. And so it goes on, accumulating interest upon interest, generating progressively larger returns as the interest compounds over time.

This leads to one of the most important implications of compounding – the need to start investing early. This means you will have as long as possible for the effects of compounding to work its magic.

For example, somebody investing £10,000 and leaving it invested in the stock market for 10 years, where it earned an average of 5% a year, would arrive at a total value of £16,288 after 10 years. That’s more than £6,000 profit accrued by leaving an investment alone and letting it grow.

But if it were left for 20 years, that same £10,000 would grow to £26,532, of which more than £16,000 is compounded investment returns.

Over 30 years the total balloons to £43,219, and over 40 years that original £10,000 investment would grow to £70,399, assuming the same 5% annual return.

As you can see, the returns on the investments are the same in percentage terms: the only difference is the time that the money is left in the market to benefit from compounding.

When it comes to compounding, time is everything, so don’t delay.

Liz Alley, divisional director of Financial Planning at Brewin Dolphin, says the message is simple – start early.

“It really is miraculous what a difference time makes to your investment,” she says.

”Delaying your saving by just a few years can have a dramatic effect on the sums you can accrue, so the earlier you start, the better it will be - both in terms of the amount you save, and avoiding the stress associated with trying to make up for lost time later on.”

  

 

 


The value of investments can fall and you may get back less than you invested.

Past performance is not a guide to future performance.

No investment is suitable in all cases and if you have any doubts as to an investment's suitability then you should contact us.

The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

Your next steps

Manage Your Wealth

Start a conversation

Find out how we can help guide your wealth journey, by requesting a callback from a member of our team.

FIND OUT MORE
CLOSE

REQUEST A CALLBACK

I am ready to start a conversation

Find out how we can help guide your wealth journey.

We will match you to the Brewin Dolphin office that is closest to your Post Code for your initial conversation.

Please select if you would like to choose a Brewin Dolphin office other than the one closest to your post code.

Understanding your level of wealth will inform our conversation about which services would be most suitable for your circumstances.

Are you a Brewin Dolphin client?

We respect your privacy and take protecting it very seriously. We will only use your data in order to arrange a meeting to discuss your needs (as explained above) and as set out in our Privacy Notice. In keeping with our existing practice, we will never sell your personal data to any third parties. You can change your preferences for how we use your data at any time by contacting your usual contact at Brewin Dolphin by phone, post or email. Please allow 14 days from receipt of your information for any changes to be reflected across our systems. 
We do not sell, rent or loan any identifiable information collected on this site. Any information that you give us will be treated with the utmost care and security. It will not be used in ways to which you have not consented.

Get Started in Minutes

Start investing online

Start investing from £2,000 with the Brewin Portfolio Service. Sign up online. Simple, accessible and cost efficient. Capital at risk.

FIND OUT MORE

Receive Our Insights

Stay updated

Receive email updates with news and views from Brewin Dolphin and information on our products and services.

FIND OUT MORE
CLOSE

Newsletter Signup

Stay updated

Receive email updates with news and views from Brewin Dolphin and information on our products and services.

Capturing your post code will allow us to tailor some of our communication to include regional views and updates that may be of interest to you.

We respect your privacy and take protecting it very seriously. We will only use your data in accordance with your preferences stated above. In keeping with our existing practice, we will never sell your personal data to any third parties.

If, in the future, you would like to update any of your marketing communication preferences, you will receive an email that will provide a link to our Preference Centre.