Compounding Is The Key Ingredient To Wealth

In one of my earlier posts, I talked about slow-medium growth being far better and far more sustainable than fast growth. This is true but I neglected to illustrate just how "fast" slow-medium growth actually is. Finance is all mathematics and once you understand the numbers, it makes everything very clear.

As a trader, I typically take small bets on each trade I make to make more money than what's being risked. This typically nets me anywhere between 100-1000% annual returns. This may seem very high (and it is when compared to large hedge fund managers on Wall Street), but as a day trader, trading a much smaller amount of money, it can be done taking small amounts of risk on short term individual trades. Some traders have returned +2000% in past years. The point is, when you look at these numbers, one gets excited but the truth is, even when making a much lower profit on a yearly basis, when compounded, the returns can really add up (and quickly) once an account matures.

I wonder how much money you would have after 10 years if you invested $1 and grew it by 100% every year after?

1st year = $1
2nd year = $2
3rd year = $4
4th year = $8
5th year = $16
6th year = $32
7th year = $64
8th year = $128
9th year = $256
10th year =$512

$511 of profit in 10 years is not so bad from an investment of only $1. Realistically speaking, if you invested $1000 instead of just $1, that profit jumps to $511,000. Let's say instead of trading for just 10 years you wanted to trade for 20. I wonder how that would change the end result?

11th year = $1,024,000
12th year = $2,048,000
13th year = $4,096,000
14th year = $8,192,000
15th year = $16,384,000
16th year = $32,768,000
17th year = $65,536,000
18th year = $131,072,000
19th year = $263,144,000
20th year = $524,288,000

Now the game becomes exciting. I'm not sure of any job out there where you can make over $524 million in just 20 years. This is all because of the power of mathematics, more specifically, compounded growth.

Some of you may say, wait a minute, 100% return a year is a bit "unrealistic"!. Fair enough. If you shoot a bit lower, lets say a 50% return annually, you would still walk away with a cool $2,216,837.82. Point is, compounded growth speeds up the accumulation of wealth over time to a point where unbelievable returns are attained. Stop trying to do it all in one year. Have some patience and the days will come where speed of growth is the last thing on your mind. If you're like me, and never want to fully retire, then you have a very bright future ahead of you once you figure out a system that works out for you. Keep doing that over and over again and change your life forever in the process.