Harness the power of dividends and compounding
Harnessing the power of compounding can greatly impact the amount of returns an investor makes. We analysed the returns an investor gets from investing an initial $100 into the MSCI World Index. This would have grown to over $1,600 today if we merely look at the price returns.
The compounding effect will greatly increase returns if dividends are reinvested over time. If dividend payments were included, assuming they were reinvested and allowed to compound within the account, the $100 would have grown to more than $6,000 today.
Left chart: Compound interest has been called the eighth wonder of the world. Its power is so great that even missing out on a few years of saving and growth can make an enormous difference to your eventual returns. Starting at age 25 and investing £5,000 per year in an investment that grows at 6% a year would leave you with over £400,000 more by the age of 65 than if you started at 35, even though overall you would only have invested an extra £50,000.
Right chart: You can make even better use of the magic of compounding if you reinvest the income from your investments to grow the starting value even more each year. The difference between reinvesting the income from your investments and not over the long term can be enormous.
Action Point: Start early. Invest regularly. Re-invest income from investments if you don't need it.
