"Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it." - Albert Einstein
Compound Interests and Compound Returns
The two terms are often mistaken as the same by investors. Savers earn compound interests e.g. 8% fixed deposits with auto-renewal. Compounding in financial instruments like fixed deposits means interest is not only earned on a principal sum but also on any accumulated interest. That concept of compounding effect in saving must not be applied to investing in stocks market.
The returns on your portfolio of stocks are subjected to the volatility of the stock market so your compound returns may not necessary be the "eight wonder of the world". You may be even wondering why you are getting negative returns after XX years?
I illustrate the examples in the table below:......
