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Understand the power of compounding from "summary" of The Little Book of Common Sense Investing by John C. Bogle
The power of compounding is a concept that is both simple and incredibly powerful. It is the idea that when you invest your money and earn a return on that investment, the returns themselves also earn returns. This process can lead to exponential growth over time, allowing your money to work harder for you. To understand the power of compounding, consider a hypothetical example. If you were to invest $1,000 and earn a 10% return, you would have $1,100 at the end of the year. If you were to leave that money invested and earn another 10% return the following year, you would have $1,210 at the end of the second year. Over time, this compounding effect can lead to significant growth in your investment. Compounding works best when you give it time to do its magic. The longer you leave your money invested, the more time it has to grow. This is why it is important to start investing early and to stay invested for the long term. By doing so, you can take advantage of the power of compounding and maximize the growth of your investment portfolio. Another key aspect of compounding is the importance of reinvesting your returns. When you reinvest your returns, you are putting your money back to work, allowing it to continue to grow over time. This can have a significant impact on the growth of your investment, especially when combined with the effects of compounding.- The power of compounding is a simple yet powerful concept that can help you grow your wealth over time. By understanding how compounding works and taking advantage of its benefits, you can set yourself up for financial success in the long run. So, remember to start investing early, stay invested for the long term, and reinvest your returns to make the most of the power of compounding.
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