Investment compounding is a very simple but completely counter-intuitive way to make a lot of money trading. Give me a couple of minutes of your time and I can show you the beauty of investment compounding.
Investment compounding is a hugely useful tool in the art of trading. Now that you know how to protect your money with good money management, here’s a simple but important lesson.
The point at which you take your profits out of the market (out of your trading float) depends on your objectives. If you’re trading for income you’re obviously going to need to pull money on a more regular basis. If your aim is capital growth, you should leave your capital for a three to five-year term, letting the magic of compound growth take effect.
If you are trading for the long term then compounding of your investments can be a truly overwhelming experience that sees you laughing all the way to the bank. Investment compounding is a very simple method to understand and apply that will lead to incredible results for long term capital growth.
Compounding: The Eighth Wonder of the World
I know you’ve probably heard it before but… compounding is a very useful and powerful method of growing your capital by reinvesting your profits into your investments. The power of this principle is demonstrated in the following example.
You invest $ 10,000 and your trading system returns approximately 15% per year. If you take all the profits you earn out of the market, without reinvesting, the annual return on a $ 10,000 account is approximately $ 1,500. In 10 years’ time, we will have profited to the tune of $ 15,000.
Let’s now add in the practice of compounding our winnings. In other words, we will not withdraw the 15% profit but will reinvest the money into our account, allowing the money to compound. The example below shows how much more we can expect to make by using this simple and effective method.
Year Total account value at 15% growth and compounding the winnings
The table shows that the initial seed capital has grown to $ 40,456 in 10 years, producing a return of over $ 30,000! This is over double the amount you can expect from not compounding your winnings. Just imagine what the results will be once you have mastered trading and produce a return higher than 15% per annum.
This example illustrates the importance of investment compounding. When you are on to a winner it is of essential importance to maximise your profits and exit the markets with the highest possible returns. This will guarantee fantastic capital growth.
Good luck investment compounding!