I reckon the first wonder of the investment world is the power of compound interest

I reckon the first wonder of the investment world is the power of compound interest. It's well-known that growth assets like shares and property provide higher returns than defensive assets like cash and bonds over long periods of time. This is because their growth potential results in higher returns over long periods of time which compensates for their higher volatility compared to more stable and less risky assets. The next chart is my favourite demonstration of the power of compound interest in action for investors. It shows the value of $1 invested in 1900 in Australian cash, bonds and shares with earnings on each asset reinvested along the way. Since 1900 cash has returned 4.8% per annum, bonds have returned 6% pa and shares returned 11.9% pa. In this article I explain what compound interest is, demonstrate it in practice and look at some implications for investors. (VIEW LINK)


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