The principle of compounding
The principle of compounding
Section Heading
The first is from the contributions that you or your employer make. The second is through investment returns. The advantage of investment returns is that they benefit from compounding. That is, the more investment returns you receive, and the higher your account balance, the more investment returns you will receive.
Section Heading
Here’s how compounding works…
Over time, investment returns are added to your accounts. The total then goes on to earn more investment returns. So, you may earn investment returns on your investment returns.
This table is an example of how compounding can make a difference to your investment. If you make an investment of $100 today it will be worth more and more over time with positive returns. How much it’s worth depends on the investment return earned by your chosen investment option. This table demonstrates the principle of compounding, assuming your investment return earns a constant positive percentage return.
Section Heading
| Number of Years | Investment Return | ||
| 4% |
5% |
6% |
|
| 1 | $104 | $105 | $106 |
| 5 | $122 | $128 | $134 |
| 10 | $148 | $163 | $179 |
| 15 | $180 | $208 | $240 |
| 20 | $219 | $265 | $321 |
Remember, investment returns can be negative from time to time. When this happens, it may take some years for your investment to regain its previous value.
However, it is important to remember that when this occurs:
- Any decrease in value is only on paper, which isn’t ‘locked in’ unless you decide to switch investment options, or you withdraw funds from your investment; and
- Depending on what option/s you are invested in, lower markets may represent an excellent opportunity to invest additional funds (that is, purchase additional units while the price is low).
Section Heading
Help making your choice
Ultimately, you need to do what is best for you. If you need help with making your investment choice or with planning for your financial future, you can always discuss your situation with a licensed financial planner.We’re here to help. Register now for a webinar to find out more.
