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? - Seedly
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Anonymous

Asked on 27 May 2020

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?

Does compounding work the same for cash in bank, endowment plans and stocks?

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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.

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Frankie Rappaport
Frankie Rappaport
Top Contributor

Top Contributor (Aug)

Level 9. God of Wisdom
Answered on 29 May 2020

Exponential

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Sharon
Sharon
Level 7. Grand Master
Answered on 28 May 2020

You might want to read this. Figures and photos with real people's endowment policies that have matured.

https://investmentmoats.com/budgeting/do-your-insurance-saving-plans-endowment-give-you-3-to-5-returns/

There will be opportunity cost in everything we do. Resources are limited. Hence, it's important to choose carefully the vehicle to compound your money that suits your risk appetite and situation.

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