Power of Compounding
Power of compounding (compound interest) is a known description for fast increase in value when investment brings steady interests and interests are reinvested. The principle of the growth is the geometric progression, which works when interests are reinvested.
In the picture you can see the sample of power of compounding. Such investment portfolio development would be if investor would invest $100 at the beginning and would earn each year an annual return of 12%, which is possible. After 50 years he would have $28900 from $100 invested.
That’s why investment consultants always says that investor has to start invest early as possible and continue investing until remuneration, because the longer is the period of investing the more rapid growth can be seen in investment portfolio value.
When return of investment portfolio is calculated, compounded interest has to be taken into consideration, and the best way is to use CAGR formula for that.
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