# Where is compounding interest?



## emperor (Jul 24, 2011)

I'm confused on compounding interest, over the years I've heard the miracle of compounding interest. Almost all financial arguments and articles bring up compounding interest and say stuff like with only 10k and 6-12% compound interest you get 300K over 30 years. But in my account over 30 years my 10K turns to 14K... So I'm very confused how this is all supposed to work. Are we talking in a utopian world here or what? Where is this 6-12% compound interest?


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## dogcom (May 23, 2009)

If you had bought longer dated bonds you may have seen the gains that you had wished to see.

If you had bought equities through mutual funds and such you would have lost out to MER's and looking at past returns to buy those funds.

Everyone always talks about the past and so on but many haven't really lived it because if they had they would have looked at mutual funds and not done the DIY that they do today.


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## dogcom (May 23, 2009)

I would also like to say that buy low and buy solid companies would be a way to go. Many solid companies go in the ditch like Nortel and Laidlaw and such so don't listen to the hype.


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## GoldStone (Mar 6, 2011)

emperor said:


> But in my account over 30 years my 10K turns to 14K...


Your compounded rate of return is 1.13% per year.

That is a very poor rate of return, to state the obvious. What did you invest in?


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## dogcom (May 23, 2009)

How old are you Goldstone because it may explain why you are puzzled. If you had lived during these times in the last 30 years it is very different then today and that is not a dig at you.


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## GoldStone (Mar 6, 2011)

46. Started investing in 1998-1999. The first ~10 years of my investment career coincided with the lost decade for equities. Two big market crashes within 10 years.

30 years period includes 1990s, the greatest bull market in the human history.


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## emperor (Jul 24, 2011)

Oh k that's what I thought, so compound interest is just invest and hope for a return. The way people talk about this 6-12% return I thought maybe there was a 30 year GIC or something at that rate, they make it sound like it's easy. So for their figures to work and to get those nice numbers you have to find an unusually high paying investment. I'm invested in everything but I do have some GIC and HISA at that rate. Think my TFSA is 1.35 or something, I got some in the stock market also, but for the stock market to compound wouldn't it need to be a DRIP account?


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## dogcom (May 23, 2009)

During the big run of the 90's mutual funds were the game and not DIY and many used past returns to purchase these funds. I found I made money investing in bonds during the 80's and 90's. I made money in value funds also but it did take a lot of patience.

Emperor you have it about right for the normal investor. They made money because of return on high rates and not stocks. If you had a lot of money in those days then yes you could have made high returns in the stock market because most couldn't afford the expertise.


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## GoldStone (Mar 6, 2011)

emperor said:


> but for the stock market to compound wouldn't it need to be a DRIP account?


Not necessarily. Berkshire doesn't pay a dividend. The stock price compounded at a rate of 27.5% from 1967 to 2007.


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## Just a Guy (Mar 27, 2012)

Well, it doesn't come from a bank account paying .25%...and if you trusted most "advisors", they probably did make 6% on your money...for themselves in commissions and fees. 

If you want other people to do the work for you and don't do anything (as far as the work goes) for yourself, can you really expect the results you got?


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## jcgd (Oct 30, 2011)

It all hinges on your returns. My $10k turned to something like $18k in three years. Compounding is wonderful!


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## P_I (Dec 2, 2011)

@emperor, they are referring to the Rule of 72, which states you divide 72 by the interest percentage per period to obtain the approximate number of periods (usually years) required for doubling. Examples (not real-life these days) using 6% or 12% makes the doubling math easy. 

You might also read or hear this Quote by Albert Einstein: "Compound interest is the eighth wonder of the world" which is only part of the full quote


> Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it


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## Oldroe (Sep 18, 2009)

Information was very difficult in the 90's and you needed a lot of money to buy 100 block shares.

High mer mutual are what we had. I worked very hard at it reading prospective reading news papers and yes I understood what a drag on profits mer was and still made good money.

It's not a go to sleep and wake up 30 years later rich.

Recently my dad was bitchin and a mutual he had for 15 years that was only up $50. So I got the name and looked it up 3 times in the last 15 years he could have sold for 100-250% profit.


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## heyjude (May 16, 2009)

Two things.

1. There are two threads with the same title. Could the moderators please merge them? 

2. What is being discussed in the two threads is investment returns (of a variety of securities). Compound interest is a mathematical concept that has nothing to do with capital gains or losses. You all learnt the math in high school. The power of compound interest depends, pure and simple, on *interest rate* and *time*.


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## peterk (May 16, 2010)

I think OP is referring to what he gets in interest from a savings account _right now_ would compound very poorly over 30 years going forward. Not his actual returns for the past 30 years...?

And the magical 6-12% never did come savings accounts and GICs, it came from takings risks with stocks and bonds.


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## Longwinston (Oct 20, 2013)

emperor said:


> Oh k that's what I thought, so compound interest is just invest and hope for a return. The way people talk about this 6-12% return I thought maybe there was a 30 year GIC or something at that rate, they make it sound like it's easy. So for their figures to work and to get those nice numbers you have to find an unusually high paying investment. I'm invested in everything but I do have some GIC and HISA at that rate. Think my TFSA is 1.35 or something, I got some in the stock market also, but for the stock market to compound wouldn't it need to be a DRIP account?


In today’s world you cannot get 6-12% annual returns in bank savings accounts or government backed debt. You would need to be invested in equities. 6% CAGR is pretty easy to get. 12% is a little harder.  Compound interest is a fact and it is powerful. It sounds like you are just starting out in investing. I recommend getting some good investment books and read up on it. I am a Dividend growth investor. If your investment is paying you a 3% dividend you only need a price increase of 3% to get to 6% CAGR, so pretty doable.


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## Longwinston (Oct 20, 2013)

peterk said:


> I think OP is referring to what he gets in interest from a savings account _right now_ would compound very poorly over 30 years going forward. Not his actual returns for the past 30 years...?
> 
> And the magical 6-12% never did come savings accounts and GICs, it came from takings risks with stocks and bonds.
> 
> View attachment 358


Interest rates in the 70's and early 80's would like a word with you.


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## MoneyGal (Apr 24, 2009)

The ENTIRE PLOT of Die Hard rests on the 20% rates prevailing in the 1980s! (We need a Die Hard ZIRP edition.)


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## the-royal-mail (Dec 11, 2009)

You need to invest $10,000 *per year *to end up with these sorts of amounts. For example, if you add $10K per year for 20 years and collect a 9% return each and every year, you will end up with around $500,000 in the end when you factor in the interest and your annual contributions. I suggest you learn to build these models for yourself in excel rather than to blindly believe what you read. Also consider your fees and taxes payable every year and that you would have to be one heck of a good investor to average 9% per year. Not many people manage to do that.


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## Rusty O'Toole (Feb 1, 2012)

The game is rigged. As you have found out, you are not going to get the benefit of compound interest by listening to the mainstream media or letting banks, insurance companies or financial advisers invest for you.

Too bad it took so long to figure it out. Now you need to learn how to invest for yourself.


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## Oldroe (Sep 18, 2009)

Their are "NO GO SLEEP AND WAKE UP RICH" plans.


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