Compounding – The eighth wonder of the world

One of the simplest yet most effective ways of ensuring that you have enough money to take care of your critical goals is to start early and stay invested for the long term. The combined effect of these three factors is truly magical, but it is more to do with pure mathematics than any sort of magic.

An old Indian story goes like this – Once a very learned man came to the court of the king of a very big and prosperous land. He had fallen on bad times and his family did not have sufficient food to eat. He impressed the king with is skills and the king asked him to name his reward. He asked for a chess board to be brought in. Once it was brought, he said he would like to have one grain of rice to be placed on the first square, two grains on the second, four grains on the third and the grains to be doubled in a similar manner for all subsequent squares of the board.

The king was very surprised and thought that the learned man was asking too little for his skills. He asked the learned man of he was sure that he did not want gold or any other riches. The learned man said he wanted the rice. The king asked one of his men to do the counting and provide the grains. In a short while, the royal treasurer stepped forward and told the king that they did not have sufficient grains to complete the request. Not only that it would take many centuries to in order to achieve the total grains asked by the learned man. The grains required for the 64th square run into trillions. This was possible due to the effect of compounding which Einstein referred to as the Eighth Wonder of the World.

Power of compounding

 

 

Time in the market is more important than ‘timing’ the market. Understand this and you do not have to worry about whether the market is going to go up or down. You will have more peace of mind and more money in your pocket.

Quick learnings:

  1. Starting early will give your investments the extra kick
  2. Have a long term horizon. This will help your investments to ride the ups and downs of the market
  3. Have growth assets as a significant part of your long term portfolio

Sudipto Roy was heading Treasury function for Tata SSL and has an extensive experience of the Indian financial markets with a career spanning over 27 years he has worked in diverse industries such as Financial Planning & Distribution, Asset Management, Life Insurance, Insurance Broking, Equity etc. He has held a leadership position in PNB Principal Financial Planners, Kotak Mahindra Mutual Life Insurance, Birla Sun Life Insurance, and Kotak Securities.