How does compounding work? Will "buy and hold" or "time in the market is more important than timing the market" always prevail? What does it apply to?

Exponential

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Hi anon,

Compounding works on the idea that 'interest is earned on the interest'. Substitute interest for returns, and it's still the same idea.

For example, if you have $10000 and put it in a FD of 1%, you'll get $100. If you put that $10100 in a FD again, you will now get $101. That extra $1 was due to the fact that the $100 you earned in the first year, will now be able to earn returns on itself.

Repeat the process and you can see that it adds up pretty quickly. Thus, time in the market is more important than timing the market. A simple (but not exact) exampleWhich is bigger, 3^5 or 5^3? The first number is the return, and the second is your time in the market. 3^5 is bigger, which just shows that, with a modest return but enough time, you will perform better than with a bigger capital but insufficient time.

I'd venture to say that this whole idea of compounding will work the same regardless of cash or endowment or stocks. Start early, it's the best thing you can do for yourself.