Three factors that control the power of compounding
As many people say, compounding is just a magic that works well in finance. The magic of compounding is the best way to increase our money over time. We may not be able to understand what happens but we can do a simple investment religiously and consistently and see the magic happens. Today I'm realizing the opportunities that I had for doing simple investments. I had started an SIP several years back and did it for a few months and stopped doing it. Today after seeing its value and growth, I regret that I should have continued it and not stopped it.
Based on how much we invest at what time we invest and the returns we get, things can change and it can be very interesting to watch. For some people, it can even be a thing to retire early. The following factors control the power of compounding.
Invested money
Money plays a very important role in compounding. We know that investing a higher value always has its advantage and in the case of compounding that helps in growing the asset exponentially. During the early days of our career, we may not have a huge amount of money to invest but gradually when we start pushing some funds consistently or regularly, we can see our corpus growing. This is how the invested money plays an important role. As we grow bigger in terms of salary, we can always invest more money to compound it.
Invested time
Time is the most important thing. We have to plan it very well so that the invested time makes a huge difference. There is no point in investing when the market is at its peak. We have to understand the trend of the market and if we are lucky and if we invest when the market is very low, we should be able to reap bigger profits in a very short time. If we wish to compound that value, that can also happen but investing at the right time is very important to enjoy the benefits.
Some people invest when the market is not very great and expect their money to grow. They either have to wait for several years or they have to book their loss. I remember a person who invested in Bitcoin during its peak and saw it go down after a bull run. He booked his loss when the value became half and started bad-mouthing about Bitcoin saying that it was a huge scam. This is an example of how he was an idiot and how timing plays a very important role in investing.
Growth Rate
We shouldn't be investing in something that has no good returns. If we have to invest on something for a good return, then growth rate is an important thing. If our investment starts picking up after a few years, even then we are at a loss because we are not considering inflation as the criteria. Overall the growth rate should be very good so that the power of compounding works very well.