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  • Writer's picturePatricia A. Stewart | CFA

The Importance of Compound Interest and Growth with Investing

You’re never too young or too old to start investing. If anything, the sooner you start to invest the more time your money has to grow. Even the amount you start with doesn’t need to be big. Thanks to the magic of compounding, reinvested interest or dividends can earn more interest which can supercharge the growth of your savings and investments.

How Does Compound Interest Work?

When you reinvest interest or dividends, you’re not just earning interest on the principal balance. Instead, your interest and dividends earn interest, which compounds your returns. Most investors don’t pay a lot of attention to compound interest, but the fact is, compounding will actually account for a huge share of a portfolio’s balance.

Below are three examples that show just how powerful compounding can be to your investing portfolio.

Example 1:

If you have $1,000 in a high-interest savings account and it earns 5% in annual interest, in one year the new balance would be $1,050. By the end of the second year, you would earn 5% on your new balance ($1,050), which would earn you $52.50. Now, your new balance would be $1,102.50.

In investing there is something called the Rule of 72, which shows that any portfolio that earns an average interest rate of 5% will double in value in roughly 10 years. In the above example, if you’d left that initial $1,000 alone for 30 years, the balance would be $4,321.94.

Example 2:

For our second example, if you invested $100 per month for 30 years and the investment enjoyed a 5% annual rate of return, after 30 years, you’d have $83,257.64. Of that portfolio balance, just $36,000 would be a result of your contributions. The remaining $47,572.64 would have accrued from compound interest.

Example 3:

Lastly, there’s the importance of reinvesting dividends. After 193 years, the Bank of Montreal (BMO) has the longest-running dividend payout of any company in Canada. It’s policy is to pay out 40% to 50% of its earnings to shareholders. If you had invested $1,000 in the Bank of Montreal at the start of 2002 and cashed in your quarterly dividends, your initial investment over the past 20 years would have grown a whopping 780% ($7,800). Those kinds of capital gains highlight the strength of Canada’s financial institutions. However, had you reinvested those dividends, the value of that investment would today be worth $12,202.15, for an average annualized return of 12.89%.

With the right investing strategy, you can make compounding work for you.

Sharp Asset Management for Your Retirement Planning

When it comes to compound interest and growth, the amount of time is one of the most important factors. The sooner you start saving and investing, the more time you give yourself to let that money grow.

If you live in Toronto, Mississauga, or anywhere in the GTA and are looking for a portfolio management firm or asset management company to help you build a diversified retirement portfolio designed to suit your investment goals, Sharp Asset Management can help.

Sharp Asset Management Inc. is an independent portfolio management firm that is 100% owner-operated. Since we are a highly concentrated group of professionals, we can respond quickly to changing market conditions.

Sharp Asset Management is not affiliated with any financial institution, securities firm, or mutual fund company. Nor do we earn any commissions or fees on investments we choose for our clients. That means our team of wealth management professionals is focused exclusively on helping you achieve your unique, long-term investing objectives. To learn more about investing with Sharp Asset Management, contact us today.

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