Let’s start today’s blog with a story. You must have heard the Chessboard legend where a chess game that began with 2 grains of rice ended with the king selling his kingdom. In the game the number of grains of rice doubled with each square leading to a number which was unfathomable to the king. Just as the king underestimated the power of compounding so do we in our lives.
“Compound interest is the eighth wonder of the world. He, who understands it, earns it … he who doesn’t … pays it.” – Albert Einstein”
The story of the chessboard legend is a powerful illustration of the concept of compounding, which can be applied to investing money. Just like the number of grains of rice on the chessboard doubled with each square, investment returns can compound exponentially over time, allowing investors to reap the benefits of both their original investment and the returns it generates.
Let us understand how compounding can work in Investing. In the formula of Compound returns, A=P (1+R) t, T the time is the real hero. By starting early, investing regularly, and reinvesting dividends and returns, investors can build wealth over time through the power of compounding. Compounding can work exponentially ONLY when you have time by your side, so the magic lies in T, the time.
The question that naturally comes to mind is HOW to increase the T and make the most of it? The answer lies in the question itself. T can be increased by starting investments early. Starting your investment journey at an early age is one of the most powerful decisions you can make for your financial future.
However, one of the most common mistakes that people make is delaying their investment plans, thinking that they have plenty of time to start investing. But in reality, time is the most important factor when it comes to investing. The earlier you start, the more time you have for your investments to grow and compound. The sooner you start investing, the more time you have, to take advantage of the power of compounding.
Let’s take a look at Indian Stock Market as an example. The Indian stock market has seen tremendous growth over the past few decades. If you see the below chart you realize that NIFTY 50 has given approx 62times returns since its inception with a CAGR of 13.4%. (Data reference from Fundsindia). If someone had invested Rs. 1,00,000 in 1990 , it would have become Rs.62,00,000 now.
Let us have a look at below chart which shows the number of times money multiplied in Indian Equity markets in last few years. Taking example of BSE Sensex, we can see by staying invested in Equity Market for 15 years, the money multiplied by 4.6 times, whereas just by staying invested for 5 more years the value multiplied by 25.9 times. Which means even a late start of 5 years can set you back reasonably. Hence, the best decision will always be to start NOW no matter how small the amount is.
Additionally there are few more benefits if you start investing early, and one of them is high risk appetite when you are young. Having a high risk appetite when young can be beneficial when it comes to investing early because it allows for greater potential returns over the long term. Younger people typically have a longer investment horizon, which means they have more time to ride out market fluctuations and recover from any losses that may occur.
By investing in riskier assets such as stocks, young investors can potentially earn higher returns than they would with more conservative investments like bonds or savings accounts. This can help them build wealth and reach their financial goals faster.
Time in the Market vs. Timing the Market
Time in the market” refers to the idea of staying invested in the market for a long period of time, regardless of short-term fluctuations. This strategy relies on the power of compounding returns over time; where reinvesting your gains can help your investments grow exponentially. On the other hand, “timing the market” refers to the practice of trying to predict when the market is going to rise or fall, with the goal of buying low and selling high. It is always better to have a longer time in the market to actually timing the market as requires time and expertise in the field.
In conclusion, the power of investing early cannot be overstated. By starting to invest even small amounts as soon as possible, you can harness the power of compounding to create a substantial portfolio over time. Waiting for more money to come may seem like a reasonable approach, but it is a mistake that could cost you dearly in the long run. So, take action now and start investing, no matter how small the amount. Remember, even the tiniest seed can grow into a mighty tree with time and patience. The power to create wealth is within your reach – seize it today and watch your investments grow into a bountiful harvest tomorrow.