Magic of Compounding

The power of compounding is an often talked about topic and has been a frequently cited element to investing. This to the extent of it being touted as the 8th Wonder of the World by Albert Einstein.

Although I have heard and known about this 'power' for quite some time and have always applied it religiously to how I dealt with my portfolio, the importance of it did resurface strongly again recently. I recently did a review and asked myself how much I was looking to have at certain ages and at retirement. As I grow older and hopefully more mature, materialistic pleasures start to take more of a backseat and financial freedom is becoming more and more of a priority. This of course is aligned to my main dream which is to be able to transit to a Full Time Investor some day and have passive income support my necessities.

I recently also re-visited the Rule of 72, whereby you are able to calculate approximately when your investment will double by dividing 72 by the rate of return. So for eg. if the rate of return is 6%, 72/6=12, you will take around 12 years to double your investment. This is a very real and powerful effect of compounding, which in all honesty is pure mathematics (a sum grows to a larger sum, which grows to an even larger sum when compounded). Thus, reinvesting your stock dividends is an integral part of adding 'fuel' to the compounding effect.

Therefore, the importance of any succesful investing strategy is to invest in quality companies, stay invested over the long term, dollar cost average when markets are panicky and most importantly reinvest dividends over time. It is a long journey, but one that is full of rewards when applied with discipline and a long term perspective.

*As we speak, the dividends for my OCBC Bank holdings will be reinvested at the end of the month, woohoo! It simply can't get any more enjoyable than this.

Signing Off
Transitioning Stock Investor