Stop whatever you’re doing and do the following equation in your mind. No calculators, okay:
5 + 5 + 5 + 5 + 5
Got it? Great. Now do the following equation in your mind:
5 x 5 x 5 x 5 x 5
Not as easy is it? Why?
As human beings we underestimate the power of small numbers and the impact they can have when added together – we underestimate the power of compounding. Because it isn’t intuitive we ignore it and try and solve the problem through other means.
The compounding of investments is such a powerful thing. Even the average investor can double their money in the stock market, time and time again – that’s if they stick with their stocks over the long run. One of my favourite bloggers, Josh Brown AKA The Reformed Broker recently hit the streets to help people wrap their heads around exponential growth and real wealth building. Here’s the video – watch it.
If the link doesn’t work, click here.
Time can be a better friend to investors than experience, connections, expertise, or even research. And yet so few people seem to have a good grasp of the power of compounding.
By the way, the answer to the above equation is 3,125. But hey, you knew that right?