When does the power of compounding interest really kick in?

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JD2775
Posts: 309
Joined: Thu Jul 09, 2015 10:47 pm

When does the power of compounding interest really kick in?

I am looking for a \$ amount, if that's feasible.

Was there a certain point that you noticed your investments really start to gain traction, from what you remember? I realize this may be difficult to answer as we have up and down years. Just curious.

Currently at \$350k. The jump from \$200k to \$300k was quicker than \$100k to \$200k but not hugely noticeable.

SDLinguist
Posts: 133
Joined: Wed Jan 31, 2018 2:39 pm

Re: When does the power of compounding interest really kick in?

That all depends on how much you are adding over a given span of time to the principal. Let's take round numbers to make things easy.

If you save \$10k a year and you have a return of 10% yearly you will need 100k for growth to be equal to your contributions. If you multiply everything by 10 see that you need 1 million dollars for your growth to be equal to your contributions if you were saving 100k a year.

To make the math clear, the principal needed to have growth equal to new contributions is equal to (contributions/rate of return). As an example, if you are maxing 3 of the most common tax advantaged account types in the US (IRA, 401k, HSA) for 2019 for a single person that would be \$28,500, assuming a 6% nominal rate of return you would need a total of \$475,000 for growth to be equal to contributions.

The other thing to note is that 100k to 200k was a doubling while 200k to 300k is only an increase of 1.5x. If we are only looking at constant increases, i.e. of 100k, then as the balance grows compounding speeds up the process. If we look at doubling total principal, then a constant rate of growth without any additional contributions will always double in the same amount of time, see rule of 72.

blacksmith4
Posts: 31
Joined: Wed Feb 27, 2019 5:30 pm

Re: When does the power of compounding interest really kick in?

Compound interest “magic” or “power” is a bunch of hooey. If you invest \$10k pre-tax and delay a 40% tax burden till the withdrawal, you don’t get anything extra than if you invested \$6,000 post-tax over that same time period. It’s simple multiplication and the growth has a linear relationship with the initial investment.

MindBogler
Posts: 846
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Re: When does the power of compounding interest really kick in?

blacksmith4 wrote:
Sun Mar 03, 2019 7:54 pm
Compound interest “magic” or “power” is a bunch of hooey. If you invest \$10k pre-tax and delay a 40% tax burden till the withdrawal, you don’t get anything extra than if you invested \$6,000 post-tax over that same time period. It’s simple multiplication and the growth has a linear relationship with the initial investment.
Wrong on so many fronts. We have a progressive tax scheme in this country so most people will be in a lower marginal tax bracket at retirement.

Compound interest is exponential, not linear. You need to go back to basics.

blacksmith4
Posts: 31
Joined: Wed Feb 27, 2019 5:30 pm

Re: When does the power of compounding interest really kick in?

If you double your initial investment, you earn exactly twice the amount of interest over a given time period. You do not get an exponential benefit at any particular level of investment and the growth rate doesn’t magically increase.

Wiggums
Posts: 1941
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Re: When does the power of compounding interest really kick in?

I would say that you see the power of compounding based on long periods of time and frequency. For example, annual, or once-a-year, compounding. And as you might imagine, the more often compounding happens, the faster the growth. That's because each calculation is made based on the latest account balance, and if compounding happens monthly, the balance is slightly bigger each month, so the growth rate is applied to bigger and bigger sums each month.

Patrick584
Posts: 42
Joined: Wed Sep 06, 2017 8:38 pm

Re: When does the power of compounding interest really kick in?

Compounding interest starts right away. Certainly the impact is more noticeable over time. An example to visualize compounding interest is time to double value. At 10% interest, how long does it take for a asset with reinvesting interest to double? Not 10 years, but 7 years. I would call that a big difference. Please invest right away and be amazed in several decades.

retire2022
Posts: 951
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Location: NYC

Re: When does the power of compounding interest really kick in?

JD2775 wrote:
Sun Mar 03, 2019 6:21 pm
I am looking for a \$ amount, if that's feasible.

Was there a certain point that you noticed your investments really start to gain traction, from what you remember? I realize this may be difficult to answer as we have up and down years. Just curious.

Currently at \$350k. The jump from \$200k to \$300k was quicker than \$100k to \$200k but not hugely noticeable.
It depends on what you have invested or contemplated to have invested in

Use the lazy portfolio investments and go back in time

https://www.portfoliovisualizer.com/backtest-portfolio

If you get historical prices you could also do this with Morningstar Portfolio Manager, you need to register and look up the historical prices to do the modeling

https://www.nasdaq.com/quotes/historical-quotes.aspx

https://www.morningstar.com/portfolio.html

miamivice
Posts: 2196
Joined: Tue Jun 11, 2013 11:46 am

Re: When does the power of compounding interest really kick in?

I have not noticed the power of compounding in my 16 years of financial recordkeeping.

The problem is that my salary and thus savings rate has grown faster than the benefits from compounding, so our net worth curve is best described as a linear rather than exponential curve.

willthrill81
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Location: USA

Re: When does the power of compounding interest really kick in?

Patrick584 wrote:
Sun Mar 03, 2019 8:33 pm
Compounding interest starts right away. Certainly the impact is more noticeable over time. An example to visualize compounding interest is time to double value. At 10% interest, how long does it take for a asset with reinvesting interest to double? Not 10 years, but 7 years. I would call that a big difference. Please invest right away and be amazed in several decades.
Right. The power of compounding increases as the period of time and the rate of return increase. This simple calculator from NerdWallet helps to visualize this effect.

I once heard a funny story about compound interest in a finance course. Supposedly, natives sold Manhattan island to Europeans in 1626 for about \$1,100 in today's dollars. Had that money been invested at a 5% return, it would be worth \$233,769,161,800.67 today.
Last edited by willthrill81 on Sun Mar 03, 2019 9:48 pm, edited 1 time in total.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

MotoTrojan
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Re: When does the power of compounding interest really kick in?

willthrill81 wrote:
Sun Mar 03, 2019 8:51 pm
Patrick584 wrote:
Sun Mar 03, 2019 8:33 pm
Compounding interest starts right away. Certainly the impact is more noticeable over time. An example to visualize compounding interest is time to double value. At 10% interest, how long does it take for a asset with reinvesting interest to double? Not 10 years, but 7 years. I would call that a big difference. Please invest right away and be amazed in several decades.
Right. The power of compounding increases as the period of time and the rate of return increase. This simple calculator from NerdWallet helps to visualize this effect.

I once heard a funny story about compound interest in a finance course. Supposedly, natives sold Manhattan island to Europeans in 1626 for about \$1,100 in today's dollars. Had that money been invested at a 5% return, it would be worth \$233,769,161,800.67 today. That's right, over \$233 trillion, almost triple the value of the entire world's stocks.
Interesting indeed. So real growth of the market since 1626 has been pretty abysmal it seems? Otherwise the entire world's stocks would be much larger than \$233T.

climber2020
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Joined: Sun Mar 25, 2012 8:06 pm

Re: When does the power of compounding interest really kick in?

JD2775 wrote:
Sun Mar 03, 2019 6:21 pm

Was there a certain point that you noticed your investments really start to gain traction, from what you remember? I realize this may be difficult to answer as we have up and down years. Just curious.
For me, it was when a routine 1% daily swing in the markets would equal or exceed my paycheck.

Sic Vis Pacem
Posts: 76
Joined: Mon Sep 04, 2017 8:25 pm

Re: When does the power of compounding interest really kick in?

JD2775 wrote:
Sun Mar 03, 2019 6:21 pm
I am looking for a \$ amount, if that's feasible.

Was there a certain point that you noticed your investments really start to gain traction, from what you remember? I realize this may be difficult to answer as we have up and down years. Just curious.

Currently at \$350k. The jump from \$200k to \$300k was quicker than \$100k to \$200k but not hugely noticeable.
As you asked for a \$\$\$ amount... \$500k is when we really felt like we had a tailwind. We contribute \$60-80k per year to retirement/long term savings accounts. At \$500k, a 5% return is \$25k, which you really should notice even with solid contributions. As others have alluded to, it's really your investment returns as a function of contributions that contributes (no pun intended) to the feeling that compounding is starting to play a roll in your portfolio.

willthrill81
Posts: 13959
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Location: USA

Re: When does the power of compounding interest really kick in?

MotoTrojan wrote:
Sun Mar 03, 2019 8:58 pm
willthrill81 wrote:
Sun Mar 03, 2019 8:51 pm
Patrick584 wrote:
Sun Mar 03, 2019 8:33 pm
Compounding interest starts right away. Certainly the impact is more noticeable over time. An example to visualize compounding interest is time to double value. At 10% interest, how long does it take for a asset with reinvesting interest to double? Not 10 years, but 7 years. I would call that a big difference. Please invest right away and be amazed in several decades.
Right. The power of compounding increases as the period of time and the rate of return increase. This simple calculator from NerdWallet helps to visualize this effect.

I once heard a funny story about compound interest in a finance course. Supposedly, natives sold Manhattan island to Europeans in 1626 for about \$1,100 in today's dollars. Had that money been invested at a 5% return, it would be worth \$233,769,161,800.67 today. That's right, over \$233 trillion, almost triple the value of the entire world's stocks.
Interesting indeed. So real growth of the market since 1626 has been pretty abysmal it seems? Otherwise the entire world's stocks would be much larger than \$233T.
So it would seem. Two world wars probably stymied things a bit.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

AAA
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Joined: Sat Jan 12, 2008 8:56 am

Re: When does the power of compounding interest really kick in?

blacksmith4's math is correct. If you invest P0 pre-tax dollars for n years with interest rate r, my avatar shows the value, P, you end up with. If you then pay 40% tax on that, you end up with .6 P. You get the same result if instead of P0 invested annually you invest .6 P0 after-tax dollars.

As MindBogler points out, there is benefit if you are in a lower marginal tax bracket when you start withdrawing pre-tax investments. There is no guarantee that will be the case.

NightFall
Posts: 267
Joined: Wed Mar 12, 2014 4:38 pm

Re: When does the power of compounding interest really kick in?

willthrill81 wrote:
Sun Mar 03, 2019 8:51 pm
I once heard a funny story about compound interest in a finance course. Supposedly, natives sold Manhattan island to Europeans in 1626 for about \$1,100 in today's dollars. Had that money been invested at a 5% return, it would be worth \$233,769,161,800.67 today. That's right, over \$233 trillion, almost triple the value of the entire world's stocks.
I hate to break it to you, but that's \$233 billion. Still a lot of money. Of course maintaining a 5% real over 393 years is also quite good.

sambb
Posts: 2607
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Re: When does the power of compounding interest really kick in?

miamivice wrote:
Sun Mar 03, 2019 8:38 pm
I have not noticed the power of compounding in my 16 years of financial recordkeeping.

The problem is that my salary and thus savings rate has grown faster than the benefits from compounding, so our net worth curve is best described as a linear rather than exponential curve.
THis is a wise comment for the real world

Nate79
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Location: Delaware

Re: When does the power of compounding interest really kick in?

I disagree with using the term compounding interest when discussing the investment in stocks. Investments in stocks do not have compound interest. They do not pay interest like a savings account and it is very dangerous to think otherwise.

EnjoyIt
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Re: When does the power of compounding interest really kick in?

Instead of talking in dollars, I will talk in expenses. For me, I started noticing the powers of compound interest once I had 10-15 years worth of expenses saved up.

jaydub71
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Re: When does the power of compounding interest really kick in?

Nate79 wrote:
Sun Mar 03, 2019 9:39 pm
I disagree with using the term compounding interest when discussing the investment in stocks. Investments in stocks do not have compound interest. They do not pay interest like a savings account and it is very dangerous to think otherwise.
I completely agree. The only "compounding" that could occur is through dividend reinvestment. Everything else is just the growth of the stock price.

willthrill81
Posts: 13959
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Location: USA

Re: When does the power of compounding interest really kick in?

NightFall wrote:
Sun Mar 03, 2019 9:24 pm
willthrill81 wrote:
Sun Mar 03, 2019 8:51 pm
I once heard a funny story about compound interest in a finance course. Supposedly, natives sold Manhattan island to Europeans in 1626 for about \$1,100 in today's dollars. Had that money been invested at a 5% return, it would be worth \$233,769,161,800.67 today. That's right, over \$233 trillion, almost triple the value of the entire world's stocks.
I hate to break it to you, but that's \$233 billion. Still a lot of money. Of course maintaining a 5% real over 393 years is also quite good.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

miket29
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Re: When does the power of compounding interest really kick in?

blacksmith4 wrote:
Sun Mar 03, 2019 7:54 pm
Compound interest “magic” or “power” is a bunch of hooey. If you invest \$10k pre-tax and delay a 40% tax burden till the withdrawal, you don’t get anything extra than if you invested \$6,000 post-tax over that same time period. It’s simple multiplication and the growth has a linear relationship with the initial investment.
compound interest has exponential growth, not linear.

For money compounded n times a year the formula is FV = P(1 + r/n)^ Yn where ^ means exponentiation

For continuous compounding the formula is

FV = Pe ^ Yr

averagedude
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Re: When does the power of compounding interest really kick in?

Compound interest is an amazing phenomenon. You typically notice it more later on. Im sure most of us have heard the question, would you rather make \$1000 a day for 30 days, or would you rather work for a penny and have it double every day in a 30 day period. You take the penny, but the compounding does its magic in the last 10 days. For math nerds like me, this exercise helps you understand compound interest. In a 40 year investing time horizon you will notice that the last 15 years is when you really notice it.

StandingRock
Posts: 342
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Re: When does the power of compounding interest really kick in?

jaydub71 wrote:
Sun Mar 03, 2019 9:47 pm
Nate79 wrote:
Sun Mar 03, 2019 9:39 pm
I disagree with using the term compounding interest when discussing the investment in stocks. Investments in stocks do not have compound interest. They do not pay interest like a savings account and it is very dangerous to think otherwise.
I completely agree. The only "compounding" that could occur is through dividend reinvestment. Everything else is just the growth of the stock price.
Ditto from me. There's a distinction between compound interest and the appreciation in value of an asset.

willthrill81
Posts: 13959
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Location: USA

Re: When does the power of compounding interest really kick in?

StandingRock wrote:
Sun Mar 03, 2019 10:24 pm
jaydub71 wrote:
Sun Mar 03, 2019 9:47 pm
Nate79 wrote:
Sun Mar 03, 2019 9:39 pm
I disagree with using the term compounding interest when discussing the investment in stocks. Investments in stocks do not have compound interest. They do not pay interest like a savings account and it is very dangerous to think otherwise.
I completely agree. The only "compounding" that could occur is through dividend reinvestment. Everything else is just the growth of the stock price.
Ditto from me. There's a distinction between compound interest and the appreciation in value of an asset.
Then how does one explain the "compound annual growth rate" of stocks historically being close to 7%? Is that return non-existent?

I've heard of this notion that capital appreciation cannot result in compound growth but dividends can, but that assumes that there's something special about dividends, and there isn't. Growth is growth, regardless of the source. That's the problem that the 'dividends are the thing' crowd miss.

The \$11 million that the Vanguard S&P 500 index originally started with is valued at around \$1 billion today. We can compute the compound annual growth rate for that with ease, so saying that it doesn't exist is...wrong.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

averagedude
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Re: When does the power of compounding interest really kick in?

willthrill81 wrote:
Sun Mar 03, 2019 10:27 pm
StandingRock wrote:
Sun Mar 03, 2019 10:24 pm
jaydub71 wrote:
Sun Mar 03, 2019 9:47 pm
Nate79 wrote:
Sun Mar 03, 2019 9:39 pm
I disagree with using the term compounding interest when discussing the investment in stocks. Investments in stocks do not have compound interest. They do not pay interest like a savings account and it is very dangerous to think otherwise.
I completely agree. The only "compounding" that could occur is through dividend reinvestment. Everything else is just the growth of the stock price.
Ditto from me. There's a distinction between compound interest and the appreciation in value of an asset.
Then how does one explain the "compound annual growth rate" of stocks historically being close to 7%? Is that return non-existent?

I've heard of this notion that capital appreciation cannot result in compound growth but dividends can, but that assumes that there's something special about dividends, and there isn't. Growth is growth, regardless of the source. That's the problem that the 'dividends are the thing' crowd miss.

The \$11 million that the Vanguard S&P 500 index originally started with is valued at around \$1 billion today. We can compute the compound annual growth rate for that with ease, so saying that it doesn't exist is...wrong.
Exactly willthrill. Netflix has never paid a dividend, but has had an excellent compounded rate of return. Compound growth is the same, regardless if it is dividend or capital appreciation driven.

willthrill81
Posts: 13959
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Location: USA

Re: When does the power of compounding interest really kick in?

averagedude wrote:
Sun Mar 03, 2019 10:48 pm
willthrill81 wrote:
Sun Mar 03, 2019 10:27 pm
StandingRock wrote:
Sun Mar 03, 2019 10:24 pm
jaydub71 wrote:
Sun Mar 03, 2019 9:47 pm
Nate79 wrote:
Sun Mar 03, 2019 9:39 pm
I disagree with using the term compounding interest when discussing the investment in stocks. Investments in stocks do not have compound interest. They do not pay interest like a savings account and it is very dangerous to think otherwise.
I completely agree. The only "compounding" that could occur is through dividend reinvestment. Everything else is just the growth of the stock price.
Ditto from me. There's a distinction between compound interest and the appreciation in value of an asset.
Then how does one explain the "compound annual growth rate" of stocks historically being close to 7%? Is that return non-existent?

I've heard of this notion that capital appreciation cannot result in compound growth but dividends can, but that assumes that there's something special about dividends, and there isn't. Growth is growth, regardless of the source. That's the problem that the 'dividends are the thing' crowd miss.

The \$11 million that the Vanguard S&P 500 index originally started with is valued at around \$1 billion today. We can compute the compound annual growth rate for that with ease, so saying that it doesn't exist is...wrong.
Exactly willthrill. Netflix has never paid a dividend, but has had an excellent compounded rate of return. Compound growth is the same, regardless if it is dividend or capital appreciation driven.
Neither has Amazon, Berkshire Hathaway, etc.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

CyclingDuo
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Re: When does the power of compounding interest really kick in?

averagedude wrote:
Sun Mar 03, 2019 10:19 pm
Compound interest is an amazing phenomenon. You typically notice it more later on. Im sure most of us have heard the question, would you rather make \$1000 a day for 30 days, or would you rather work for a penny and have it double every day in a 30 day period. You take the penny, but the compounding does its magic in the last 10 days. For math nerds like me, this exercise helps you understand compound interest. In a 40 year investing time horizon you will notice that the last 15 years is when you really notice it.
Yes! That is one of the examples I always like to use. It certainly is a condensed time frame, but illustrates the snowball effect - especially in the latter half of the month ( https://www.suredividend.com/snowball-effect/ ).

Day 1: .01
Day 2: .02
Day 3: .04
Day 4: .08
Day 5: .16
Day 6: .32
Day 7: .64
Day 8: \$1.28
Day 9: \$2.56
Day 10: \$5.12
Day 11: \$10.24
Day 12: \$20.48
Day 13: \$40.96
Day 14: \$81.92
Day 15: \$163.84
Day 16: \$327.68
Day 17: \$655.36
Day 18: \$1310.72
Day 19: \$2621.44
Day 20: \$5242.88
Day 21: \$10485.76
Day 22: \$20971.52
Day 23: \$41943.04
Day 24: \$83866.08
Day 25: \$167772.16
Day 26: \$335544.32
Day 27: \$671088.64
Day 28: \$1342177.28
Day 29: \$2684354.56
Day 30: \$5368709.12

Combine time with compounding...

https://www.artofmanliness.com/articles ... -interest/
"Everywhere is within walking distance if you have the time." ~ Steven Wright

bligh
Posts: 1121
Joined: Wed Jul 27, 2016 9:13 pm

Re: When does the power of compounding interest really kick in?

JD2775 wrote:
Sun Mar 03, 2019 6:21 pm
I am looking for a \$ amount, if that's feasible.

Was there a certain point that you noticed your investments really start to gain traction, from what you remember? I realize this may be difficult to answer as we have up and down years. Just curious.

Currently at \$350k. The jump from \$200k to \$300k was quicker than \$100k to \$200k but not hugely noticeable.
Compounding starts immediately, but the number at which you start to notice will depend as much on your rate of return as on how closely the person is paying attention.

The \$ amount will be different for each person but you cannot help but notice it somewhere around having a portfolio that is 10x your annual expenses. A 10% up or down year will add or remove an entire years worth of living expenses. You cannot help but notice that .

AlphaLess
Posts: 1607
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Location: Kentucky

Re: When does the power of compounding interest really kick in?

JD2775 wrote:
Sun Mar 03, 2019 6:21 pm
I am looking for a \$ amount, if that's feasible.

Was there a certain point that you noticed your investments really start to gain traction, from what you remember? I realize this may be difficult to answer as we have up and down years. Just curious.

Currently at \$350k. The jump from \$200k to \$300k was quicker than \$100k to \$200k but not hugely noticeable.
Compounding is not a function of a dollar amount.

Compounding is a function of time.
"A Republic, if you can keep it". Benjamin Franklin. 1787. | Party affiliation: Vanguard. Religion: low-cost investing.

StandingRock
Posts: 342
Joined: Sat Feb 02, 2019 6:54 pm

Re: When does the power of compounding interest really kick in?

willthrill81 wrote:
Sun Mar 03, 2019 10:27 pm
StandingRock wrote:
Sun Mar 03, 2019 10:24 pm
jaydub71 wrote:
Sun Mar 03, 2019 9:47 pm
Nate79 wrote:
Sun Mar 03, 2019 9:39 pm
I disagree with using the term compounding interest when discussing the investment in stocks. Investments in stocks do not have compound interest. They do not pay interest like a savings account and it is very dangerous to think otherwise.
I completely agree. The only "compounding" that could occur is through dividend reinvestment. Everything else is just the growth of the stock price.
Ditto from me. There's a distinction between compound interest and the appreciation in value of an asset.
Then how does one explain the "compound annual growth rate" of stocks historically being close to 7%? Is that return non-existent?

I've heard of this notion that capital appreciation cannot result in compound growth but dividends can, but that assumes that there's something special about dividends, and there isn't. Growth is growth, regardless of the source. That's the problem that the 'dividends are the thing' crowd miss.

The \$11 million that the Vanguard S&P 500 index originally started with is valued at around \$1 billion today. We can compute the compound annual growth rate for that with ease, so saying that it doesn't exist is...wrong.
Compound interest and CAGR are similar concepts but not the same thing.

I think it is important for people to understand the difference between terms.

dbr
Posts: 30802
Joined: Sun Mar 04, 2007 9:50 am

Re: When does the power of compounding interest really kick in?

StandingRock wrote:
Mon Mar 04, 2019 8:44 am

Compound interest and CAGR are similar concepts but not the same thing.

I think it is important for people to understand the difference between terms.
It is, and the whole discussion there is just a question of how willing people are to look at algebraic expressions for growth and generalize them. One example of generalization is allowing the growth in a year (or period of time) to be a randomly variable multiple of the starting value that year (stocks) rather than a fixed multiple of the starting value that year (compound fixed interest).

There are also many different kinds of averages of which CAGR is one. The general mathematical definition of average within which the different examples can be found is interesting but probably does not need to be covered in an essay here.

A lot of the discussion is a matter of paying close attention to definitions.

StandingRock
Posts: 342
Joined: Sat Feb 02, 2019 6:54 pm

Re: When does the power of compounding interest really kick in?

dbr wrote:
Mon Mar 04, 2019 8:56 am
StandingRock wrote:
Mon Mar 04, 2019 8:44 am

Compound interest and CAGR are similar concepts but not the same thing.

I think it is important for people to understand the difference between terms.
It is, and the whole discussion there is just a question of how willing people are to look at algebraic expressions for growth and generalize them. One example of generalization is allowing the growth in a year (or period of time) to be a randomly variable multiple of the starting value that year (stocks) rather than a fixed multiple of the starting value that year (compound fixed interest).

There are also many different kinds of averages of which CAGR is one. The general mathematical definition of average within which the different examples can be found is interesting but probably does not need to be covered in an essay here.

A lot of the discussion is a matter of paying close attention to definitions.
More importantly for those just starting out is to understand the difference between interest bearing accounts and investments such as stocks and bonds...

dbr
Posts: 30802
Joined: Sun Mar 04, 2007 9:50 am

Re: When does the power of compounding interest really kick in?

StandingRock wrote:
Mon Mar 04, 2019 10:09 am
dbr wrote:
Mon Mar 04, 2019 8:56 am
StandingRock wrote:
Mon Mar 04, 2019 8:44 am

Compound interest and CAGR are similar concepts but not the same thing.

I think it is important for people to understand the difference between terms.
It is, and the whole discussion there is just a question of how willing people are to look at algebraic expressions for growth and generalize them. One example of generalization is allowing the growth in a year (or period of time) to be a randomly variable multiple of the starting value that year (stocks) rather than a fixed multiple of the starting value that year (compound fixed interest).

There are also many different kinds of averages of which CAGR is one. The general mathematical definition of average within which the different examples can be found is interesting but probably does not need to be covered in an essay here.

A lot of the discussion is a matter of paying close attention to definitions.
More importantly for those just starting out is to understand the difference between interest bearing accounts and investments such as stocks and bonds...
Indeed. The starting point is probably with defining return and looking at the fact that stock returns are variable over a wide range including losing value. Interest is a special case of return that isn't very much like stock returns.

robphoto
Posts: 128
Joined: Tue Sep 25, 2018 12:42 pm

Re: When does the power of compounding interest really kick in?

I felt the "compound interest" (broadly defined, I'd just say portfolio gain) when the money I was investing was less than the gains in a year.

If you've got 350,000 now, you may be seeing in a lot of years that portfolio gains are more than the new money you're adding; at a certain point they may be more than your earnings from your job, and eventually new contributions will feel tiny relative to your balances. (God willing)

Fieldsy1024
Posts: 710
Joined: Sun Feb 24, 2013 8:23 am

Re: When does the power of compounding interest really kick in?

I hit the 100k mark in Oct. I'm around 130k as of today. I wish I didnt take a loan out for a car when I was 24, but that's over and done with.

Instead of 10% contribution, I am going for 12%, next month I will revisit and most likely jump to 15%. I will admit I haven't been so frugal as of late.

Company matches 75 cents to the dollar up to 8%. They also add an extra 7% with next year and following years 4% instead of 7%.

That should help. I think I can do at least 20% contribution and maybe more. Stupid spending on dumb things needs to stop.

Dottie57
Posts: 7154
Joined: Thu May 19, 2016 5:43 pm
Location: Earth Northern Hemisphere

Re: When does the power of compounding interest really kick in?

JD2775 wrote:
Sun Mar 03, 2019 6:21 pm
I am looking for a \$ amount, if that's feasible.

Was there a certain point that you noticed your investments really start to gain traction, from what you remember? I realize this may be difficult to answer as we have up and down years. Just curious.

Currently at \$350k. The jump from \$200k to \$300k was quicker than \$100k to \$200k but not hugely noticeable.
I think you mean compound return. It starts really showing when you have a relatively large portfolio. For me it was at 500k.

jaydub71
Posts: 19
Joined: Thu Jan 24, 2019 7:40 am

Re: When does the power of compounding interest really kick in?

StandingRock wrote:
Mon Mar 04, 2019 8:44 am
willthrill81 wrote:
Sun Mar 03, 2019 10:27 pm
StandingRock wrote:
Sun Mar 03, 2019 10:24 pm
jaydub71 wrote:
Sun Mar 03, 2019 9:47 pm
Nate79 wrote:
Sun Mar 03, 2019 9:39 pm
I disagree with using the term compounding interest when discussing the investment in stocks. Investments in stocks do not have compound interest. They do not pay interest like a savings account and it is very dangerous to think otherwise.
I completely agree. The only "compounding" that could occur is through dividend reinvestment. Everything else is just the growth of the stock price.
Ditto from me. There's a distinction between compound interest and the appreciation in value of an asset.
Then how does one explain the "compound annual growth rate" of stocks historically being close to 7%? Is that return non-existent?

I've heard of this notion that capital appreciation cannot result in compound growth but dividends can, but that assumes that there's something special about dividends, and there isn't. Growth is growth, regardless of the source. That's the problem that the 'dividends are the thing' crowd miss.

The \$11 million that the Vanguard S&P 500 index originally started with is valued at around \$1 billion today. We can compute the compound annual growth rate for that with ease, so saying that it doesn't exist is...wrong.
Compound interest and CAGR are similar concepts but not the same thing.

I think it is important for people to understand the difference between terms.
I agree. I can tell you how my interest will compound on day one of an investment in a savings account (or similar interest bearing investment) and therefore the CAGR. For a stock, I can only tell you my CAGR by looking backward at how the investment has grown in value over time. We can estimate what the CAGR will be for a stock going forward but it is only that, an estimate.

H-Town
Posts: 2115
Joined: Sun Feb 26, 2017 2:08 pm

Re: When does the power of compounding interest really kick in?

JD2775 wrote:
Sun Mar 03, 2019 6:21 pm
I am looking for a \$ amount, if that's feasible.

Was there a certain point that you noticed your investments really start to gain traction, from what you remember? I realize this may be difficult to answer as we have up and down years. Just curious.

Currently at \$350k. The jump from \$200k to \$300k was quicker than \$100k to \$200k but not hugely noticeable.
I remember 0 to 100k was taking a while, given starting salary and high expense compare the low salary. Starting at 500k, get to another 100k is less a year. It might take less than half the time getting from 500k to \$1M than getting from 0 to 500k.

Oakwood42
Posts: 194
Joined: Thu Dec 08, 2016 10:48 pm

Re: When does the power of compounding interest really kick in?

MindBogler wrote:
Sun Mar 03, 2019 8:02 pm
blacksmith4 wrote:
Sun Mar 03, 2019 7:54 pm
Compound interest “magic” or “power” is a bunch of hooey. If you invest \$10k pre-tax and delay a 40% tax burden till the withdrawal, you don’t get anything extra than if you invested \$6,000 post-tax over that same time period. It’s simple multiplication and the growth has a linear relationship with the initial investment.
Wrong on so many fronts. We have a progressive tax scheme in this country so most people will be in a lower marginal tax bracket at retirement.

Compound interest is exponential, not linear. You need to go back to basics.
+1

"Compound interest is a bunch of hooey...." Then what are we all doing here???

Oakwood42
Posts: 194
Joined: Thu Dec 08, 2016 10:48 pm

Re: When does the power of compounding interest really kick in?

willthrill81 wrote:
Sun Mar 03, 2019 10:27 pm
StandingRock wrote:
Sun Mar 03, 2019 10:24 pm
jaydub71 wrote:
Sun Mar 03, 2019 9:47 pm
Nate79 wrote:
Sun Mar 03, 2019 9:39 pm
I disagree with using the term compounding interest when discussing the investment in stocks. Investments in stocks do not have compound interest. They do not pay interest like a savings account and it is very dangerous to think otherwise.
I completely agree. The only "compounding" that could occur is through dividend reinvestment. Everything else is just the growth of the stock price.
Ditto from me. There's a distinction between compound interest and the appreciation in value of an asset.
Then how does one explain the "compound annual growth rate" of stocks historically being close to 7%? Is that return non-existent?

I've heard of this notion that capital appreciation cannot result in compound growth but dividends can, but that assumes that there's something special about dividends, and there isn't. Growth is growth, regardless of the source. That's the problem that the 'dividends are the thing' crowd miss.

The \$11 million that the Vanguard S&P 500 index originally started with is valued at around \$1 billion today. We can compute the compound annual growth rate for that with ease, so saying that it doesn't exist is...wrong.
+1

dbr
Posts: 30802
Joined: Sun Mar 04, 2007 9:50 am

Re: When does the power of compounding interest really kick in?

The whole debate about equity returns not compounding is a misunderstanding. Compound growth is a mathematical model for analyzing or representing how something changes over time and not a statement about the essence of something. That equity investments can and should be modeled as compound growth is already established as soon as one defines return as the gain in a period divided by the value at the beginning of the period. The rest is some fairly simple minded algebra. The "compoundness" comes from stringing together successive periods of return over time.

That doesn't mean one can't use a different model, but people don't use a different model.

willthrill81
Posts: 13959
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: When does the power of compounding interest really kick in?

dbr wrote:
Thu Mar 07, 2019 9:05 am
The whole debate about equity returns not compounding is a misunderstanding. Compound growth is a mathematical model for analyzing or representing how something changes over time and not a statement about the essence of something. That equity investments can and should be modeled as compound growth is already established as soon as one defines return as the gain in a period divided by the value at the beginning of the period. The rest is some fairly simple minded algebra. The "compoundness" comes from stringing together successive periods of return over time.

That doesn't mean one can't use a different model, but people don't use a different model.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

andrew08
Posts: 3
Joined: Wed Mar 06, 2019 1:00 pm

Re: When does the power of compounding interest really kick in?

When people think of interest, they often think of debt. But interest can work in your favor when you’re earning it on money you’ve saved and invested.

smitcat
Posts: 4353
Joined: Mon Nov 07, 2016 10:51 am

Re: When does the power of compounding interest really kick in?

H-Town wrote:
Wed Mar 06, 2019 9:26 pm
JD2775 wrote:
Sun Mar 03, 2019 6:21 pm
I am looking for a \$ amount, if that's feasible.

Was there a certain point that you noticed your investments really start to gain traction, from what you remember? I realize this may be difficult to answer as we have up and down years. Just curious.

Currently at \$350k. The jump from \$200k to \$300k was quicker than \$100k to \$200k but not hugely noticeable.
I remember 0 to 100k was taking a while, given starting salary and high expense compare the low salary. Starting at 500k, get to another 100k is less a year. It might take less than half the time getting from 500k to \$1M than getting from 0 to 500k.
"I remember 0 to 100k was taking a while, given starting salary and high expense compare the low salary. Starting at 500k, get to another 100k is less a year. It might take less than half the time getting from 500k to \$1M than getting from 0 to 500k."

This will be a natural viewpoint if you are younger and have been invested for maybe 10-12 years.
Once you get through a few market adjustments those views will naturally change somewhat.
Please be prepared and do not get derailed with your plans when your \$500K goes down \$100K+ in less time then you can imagine.

willthrill81
Posts: 13959
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: When does the power of compounding interest really kick in?

smitcat wrote:
Thu Mar 07, 2019 10:57 am
H-Town wrote:
Wed Mar 06, 2019 9:26 pm
JD2775 wrote:
Sun Mar 03, 2019 6:21 pm
I am looking for a \$ amount, if that's feasible.

Was there a certain point that you noticed your investments really start to gain traction, from what you remember? I realize this may be difficult to answer as we have up and down years. Just curious.

Currently at \$350k. The jump from \$200k to \$300k was quicker than \$100k to \$200k but not hugely noticeable.
I remember 0 to 100k was taking a while, given starting salary and high expense compare the low salary. Starting at 500k, get to another 100k is less a year. It might take less than half the time getting from 500k to \$1M than getting from 0 to 500k.
"I remember 0 to 100k was taking a while, given starting salary and high expense compare the low salary. Starting at 500k, get to another 100k is less a year. It might take less than half the time getting from 500k to \$1M than getting from 0 to 500k."

This will be a natural viewpoint if you are younger and have been invested for maybe 10-12 years.
Once you get through a few market adjustments those views will naturally change somewhat.
Please be prepared and do not get derailed with your plans when your \$500K goes down \$100K+ in less time then you can imagine.
And then of course, there's the simple mathematical fact that doubling \$100k does not result in the same nominal gain as doubling \$500k or \$2 million. That's why when people say "the first million is the hardest," they are mathematically correct.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

H-Town
Posts: 2115
Joined: Sun Feb 26, 2017 2:08 pm

Re: When does the power of compounding interest really kick in?

smitcat wrote:
Thu Mar 07, 2019 10:57 am
H-Town wrote:
Wed Mar 06, 2019 9:26 pm
JD2775 wrote:
Sun Mar 03, 2019 6:21 pm
I am looking for a \$ amount, if that's feasible.

Was there a certain point that you noticed your investments really start to gain traction, from what you remember? I realize this may be difficult to answer as we have up and down years. Just curious.

Currently at \$350k. The jump from \$200k to \$300k was quicker than \$100k to \$200k but not hugely noticeable.
I remember 0 to 100k was taking a while, given starting salary and high expense compare the low salary. Starting at 500k, get to another 100k is less a year. It might take less than half the time getting from 500k to \$1M than getting from 0 to 500k.
This will be a natural viewpoint if you are younger and have been invested for maybe 10-12 years.
Once you get through a few market adjustments those views will naturally change somewhat.
Please be prepared and do not get derailed with your plans when your \$500K goes down \$100K+ in less time then you can imagine.
I don't disagree. I've been through 2008, 2012, 2018. Especially in 2018 when it went down 80k from the previous high in just a few weeks while I'm on a vacation. I imagine it might be unnerving to some people, but Dec 2018 was a great opportunity for me too. Got a good tax loss harvesting and buy low with rebalancing and bonus. The run-up in Jan 2019 just put me 20% over the previous high.

smitcat
Posts: 4353
Joined: Mon Nov 07, 2016 10:51 am

Re: When does the power of compounding interest really kick in?

H-Town wrote:
Thu Mar 07, 2019 11:24 am
smitcat wrote:
Thu Mar 07, 2019 10:57 am
H-Town wrote:
Wed Mar 06, 2019 9:26 pm
JD2775 wrote:
Sun Mar 03, 2019 6:21 pm
I am looking for a \$ amount, if that's feasible.

Was there a certain point that you noticed your investments really start to gain traction, from what you remember? I realize this may be difficult to answer as we have up and down years. Just curious.

Currently at \$350k. The jump from \$200k to \$300k was quicker than \$100k to \$200k but not hugely noticeable.
I remember 0 to 100k was taking a while, given starting salary and high expense compare the low salary. Starting at 500k, get to another 100k is less a year. It might take less than half the time getting from 500k to \$1M than getting from 0 to 500k.
This will be a natural viewpoint if you are younger and have been invested for maybe 10-12 years.
Once you get through a few market adjustments those views will naturally change somewhat.
Please be prepared and do not get derailed with your plans when your \$500K goes down \$100K+ in less time then you can imagine.
I don't disagree. I've been through 2008, 2012, 2018. Especially in 2018 when it went down 80k from the previous high in just a few weeks while I'm on a vacation. I imagine it might be unnerving to some people, but Dec 2018 was a great opportunity for me too. Got a good tax loss harvesting and buy low with rebalancing and bonus. The run-up in Jan 2019 just put me 20% over the previous high.
I di not think your experiences in 2008 would be substantial being in your early 20's.
2018 was not a representative move in my opinion , please be prepared for the real moves when they arrive.

smitcat
Posts: 4353
Joined: Mon Nov 07, 2016 10:51 am

Re: When does the power of compounding interest really kick in?

willthrill81 wrote:
Thu Mar 07, 2019 11:22 am
smitcat wrote:
Thu Mar 07, 2019 10:57 am
H-Town wrote:
Wed Mar 06, 2019 9:26 pm
JD2775 wrote:
Sun Mar 03, 2019 6:21 pm
I am looking for a \$ amount, if that's feasible.

Was there a certain point that you noticed your investments really start to gain traction, from what you remember? I realize this may be difficult to answer as we have up and down years. Just curious.

Currently at \$350k. The jump from \$200k to \$300k was quicker than \$100k to \$200k but not hugely noticeable.
I remember 0 to 100k was taking a while, given starting salary and high expense compare the low salary. Starting at 500k, get to another 100k is less a year. It might take less than half the time getting from 500k to \$1M than getting from 0 to 500k.
"I remember 0 to 100k was taking a while, given starting salary and high expense compare the low salary. Starting at 500k, get to another 100k is less a year. It might take less than half the time getting from 500k to \$1M than getting from 0 to 500k."

This will be a natural viewpoint if you are younger and have been invested for maybe 10-12 years.
Once you get through a few market adjustments those views will naturally change somewhat.
Please be prepared and do not get derailed with your plans when your \$500K goes down \$100K+ in less time then you can imagine.
And then of course, there's the simple mathematical fact that doubling \$100k does not result in the same nominal gain as doubling \$500k or \$2 million. That's why when people say "the first million is the hardest," they are mathematically correct.
Absolutely agree - and the mathematical fact that a 40% loss in one year followed by 4 years of 10% gains does not put you back even.
Most folks who have not experienced these events will find this "non obvious".

dbr
Posts: 30802
Joined: Sun Mar 04, 2007 9:50 am

Re: When does the power of compounding interest really kick in?

smitcat wrote:
Thu Mar 07, 2019 12:19 pm

Absolutely agree - and the mathematical fact that a 40% loss in one year followed by 4 years of 10% gains does not put you back even.
Most folks who have not experienced these events will find this "non obvious".
True there are things there that are not obvius.

In a compound growth model -40% return in one year requires 67% subsequent return to get even because .6*1.67=1 The .6 comes from multiplying by .6 which is what 40% loss is and 67% is the return required to multiply by 1.67 and you multiply by .6 and by 1.67 because that is what the compound growth model is. The 40% thing is trying to use additive arithmetic in a compound growth model, which is mixing up the models. The definition of return is gain in a period divided by value at the beginning of the period, expressed as a percent and the portfolio evolves over time by applying multiplicative factors of 1+return for each successive period.

This is obvious if a person is familiar with the algebra involved in the model and not obvious if one isn't. The possibility that the return is different in each different period is also not an obvious possibility if compounded fixed rate of interest (same in each period) is the model one starts with.