Growth upon growth upon growth: the power of compound returns

Author - Erika Armanino

Date published:

Oliver Bourke, Managing Director at Mercury Wealth Management, explores the potential of compound returns.

Compound returns are powerful.

Compound returns give you growth on your growth on your growth…

Compounding returns are the financial equivalent of a snowball rolling down a hill; as it rolls, it gathers more snow, growing larger and gaining momentum with every turn. This is the essence of compounding returns in investing – the process where the capital gains on an investment earn additional earnings over time.

How can you benefit from this? How can you make compound returns your best friend in pursuit of wealth creation to enhance your future?

By simply being in the market.

The investment markets reward patient and long-term investors.

Let’s assume you contribute £10,000 into a Stocks and Shares ISA at the start of year one, and after fees, the markets reward you with net growth of 8% per annum.

At the end of year one, your portfolio will be worth £10,800.

At the end of year two, our friend compound returns will have seen this grow to £11,664.

10 Years? = £21,589.

Making regular contributions increases the power of compound returns even greater.

Using the same example as above, £10,000 invested each year for 10 years would see you have £156,145. Lovely stuff!

Key Points:

  • Reinvest dividends and interest: Ensure that all dividends and interest are reinvested back into your portfolio. This will boost the growth on your growth on your growth…
  • Start early: The sooner you start investing, the more time your money has to compound.
  • Be patient. Be disciplined: Compounding is a long-term strategy. The most significant benefits are seen over extended periods.
  • Regular contributions: Do you have surplus money at the end of the month? Then let your new friend compound returns handle it. Consistently adding to your portfolio can significantly enhance the compounding effect.
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