Investment Principles – Compounding – The most powerful force in the universe

We see compounding at work every day when we build out financial plans for our clients. They are often struck by the impact that small adjustments can have over the life of the plan – this is the immense power of compounding. We have all learned about compound interest in school – it is the interest that is payable on the previously earned interest. However it is often poorly understood.

I read a financial blog recently and there was a remarkable story of a lady named Anna Mott. She decided to make a gift of $1,000 to the city of Toledo, Ohio. However, there was one major stipulation; this gift must go to the city’s parks and it must be invested without access for 100 years. The gift was made in 1902; fast forward to 2002 and the value of the gift had grown to $213,000. This demonstrates the immense power of compounding over a long time frame.  

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