Reinvesting profits accelerates the compounding effect from "summary" of The Joys of Compounding by Gautam Baid
The act of reinvesting profits is a powerful strategy that amplifies the growth of wealth over time. When profits are not taken out but instead put back into the investment, they begin to earn returns themselves. This creates a snowball effect, where each cycle of profit generation builds upon the previous one, leading to exponential growth.
Consider a simple example: suppose an investment yields a 10% return annually. If you withdraw your profits each year, you will only benefit from that same 10% on the original amount. However, if those profits are reinvested, the following year, you earn 10% not just on the initial investment, but also on the accumulated profits from prior periods. The result is a progressively larger base from which returns are calculated.
This principle is not limited to financial markets. It applies broadly across various do...
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