#14 The power and benefits of compounding over time in equity portfolios
Most people are familiar with the concept of compound interest when it comes to term deposits where one can earn interest on interest by continuing to roll over a term deposit several times. However, many investors do not relate the concept of compounding to their investments in the sharemarket.
Compounding occurs in the sharemarket where income from an investment is reinvested back into the business and the gains from increasing profits and appreciating growth are left to bear additional fruit.
For investors in the sharemarket there are two ways that compounding can work in their favour to enhance their returns: