What is compound interest？

Reinvesting the original assets and then allowing those assets to continue to create more assets, creating an infinite cycle, is compound interest。

In stock market investments, the interest earned on the investment principal (dividends) is continuously invested in earning interest again to expand the size of the principal。Under the repeated accumulation of interest, it produces a compound interest effect and can accumulate considerable wealth over time.

Simple vs. Compound Interest

The biggest difference between simple interest and compound interest is that the interest earned on compound interest continues to be added to the principal, thus achieving a "rollover" effect and relatively faster asset growth.。

For the same principal, compound interest earns more interest than simple interest, and as long as N (time) is increased, the power of compound interest catalysis will increase, and the gap between simple interest and compound interest will increase.。

Four Utilization Skills of Compound Interest

Compound interest is so powerful, why are only a few people able to profit from it and accumulate it over time to grow their assets and create wealth?？Because most people ignore the 4 truths of compound interest。

Truth one: patiently waiting for compound interest fermentation

Compound interest is a test of patience game, with the growth of time, the more behind the more wealth。

Moreover, the effect of compound interest in the early stages of investment is minimal, and the waiting process can easily lead to impatience and abandonment。However, after saving the first bucket of gold, you will find that the subsequent wealth comes faster than you think.。

Truth 2: Time is the enemy of compound interest

If you want to create wealth through compound interest, time is the worst enemy.。

The N in the compound interest calculation equation represents time, and the longer the investment, the greater the compound interest effect and the faster the wealth grows。Almost all successful investors (especially value investors), such as Buffett and the Morgan family, have gone through the test of time to reap the fruits of compound interest。

Starting from a young age, the investment timeline is long enough to enjoy the long-term and slow growth of the market, and the catalyzed compound interest effect will be more amazing;

Compound interest cannot be observed in a short period of time, so investing early and racing against time can accelerate the growth of assets like a snowball.。

Fact 3: Continuous profitability is difficult to achieve

An important feature of compound interest is continuity - a percentage return on investment for ten or twenty consecutive years.

In fact, no investment product can maintain a fixed and continuous rate of return, and even Berkshire Hathaway, which is at the helm of Warren Buffett himself, has not had a smooth investment performance since 1965.

Buffett's 2020 letter to shareholders disclosed Berkshire Hathaway's return on investments from 1965 to 2020, with losses of 48% in 1974, 1990, 1999, 2008 and 2015, respectively..7%, 23.1%, 19.9%, 31.8%, 12.5%, almost all in times of crisis or great turmoil in the world economy。

The continuity of compound interest is difficult to achieve in the real stock market, what we can do is not to strive for continuous profitability, but through risk management to minimize the decline of the portfolio.。Berkshire Hathaway, for example, has experienced several plunges, but over the long term, the company's average annual payback rate was as high as 20 percent from 1965 to 2020.

To put it simply: it's okay to earn less, try not to lose money, and the performance of the investment is still considerable over the long term.

Of course, when picking investment products, don't touch what you're unfamiliar with and avoid falling into the high return investment trap of a money game.。Novices can start with relatively stable real estate trusts (REITs) and index equity funds (ETFs), first pursuing a return on investment of 5% to 8%; at the same time, actively learn investment knowledge, invest in individual stocks, and slowly increase the return rate to speed up the accumulation of wealth.

Truth 4: Constantly investing capital

In the process of accumulating the rate of return, there is a very important key, that is, in the early stage of investment must continue to invest capital, the principal earned interest continued to invest, and then earn interest, so that the capital effect to maximize。

Buffett said, "Life is like a snowball, you just find wet snow, and a long ramp, and the snowball will get bigger and bigger.。"However, to improve the compounding effect, you have to snowball while sprinkling snow on the ramp and constantly invest capital to make the snowball bigger and bigger.

SUMMARY

The miracle of compound interest does exist, but it is very difficult to practice。Only willing to adhere to, do a good job of risk management, and then through the test of time, will be able to accumulate performance and wealth。