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Compound Interest: The Most Powerful Force In The Universe?

Doug Famigletti, Portfolio Manager

June 3, 2020

Albert Einstein is widely credited for saying that “compound interest is the most powerful force in the universe. He who understands it, earns it; he who doesn’t, pays it.” During periods of market distress, it is easy for us to forget how Einstein’s simple math can transform our financial futures.

Compound Interest = Initial Investment x (1+Rate)n

When we lose patience, panic, or otherwise shorten our time horizon and withdraw our money from the market, we miss out on a critical part of the equation. The “n” (which is the amount of time our money is invested for) is the exponential component of the equation and what is primarily responsible for enabling our investments to grow at significant rates. If you are not sold on the math, perhaps the following table will be more persuasive. Consider how a $1,200 investment grows over time with compound interest through various investment instruments.

So, if you are still sitting on the sidelines trying to determine when to get back into the market, remember the following:

1. There is no perfect time to get in or out of the market

2. You do not need to enter the market all at once, enter in phases

3. Invest in high-quality companies that you believe in and want to hold for the long-term

4. The value of compound interest is that time is on your side


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