Introduction Urban Legend has it that Albert Einstein called compounding interest the most powerful force on earth. Whether Albert Einstein actually said this or not is a subject of considerable debate. Nevertheless, if Elbert Einstein did not say this, we would argue that perhaps he should have. Why? Because every investor should possess a working knowledge and a critical thinking understanding of how investing works. The time use of money is a powerful concept – in its own right. As the ancient investing axiom states “time in the market is more important than timing the market.” The power of compounding goes hand-in-hand with illuminating the importance of time as it relates to investing and the returns an investor can earn.
Additionally, the power of compounding addresses and shines a light on the concepts of risk and greater return. Conventional wisdom suggests that you should only take on more risk if you simultaneously expect a higher rate of return for your effort. A comprehensive understanding of the power of compounding justifies why it might be worth taking on more risk.
Finally, investors should also recognize that money (losses) can be recovered or made up. In contrast, once time is spent it is gone forever and there is nothing you can do to recover lost time. Therefore, it is incumbent upon all of us as investors to make the most out of not just the amount of money we have available to invest, but also the time which we all have to invest it. With this two-part series we will offer insights into the most powerful “investing” force on earth – compound interest.
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