Compound Interest

Filed in archive on April 8, 2005

"The most powerful force in the universe is compound interest." - albert einstein

From January 1980 to December 1999 the S&P 500 went from 108 to 1469. This works out to just about a 14% compound annual growth rate (excluding dividends). It was quite a run. Can we duplicate it?

2000 to 2004 haven't gotten us off to a great start but we still have time left. But just so you know, to duplicate that kind of investment environment by the end of 2019 the S&P 500 has to climb to about 20,395.

I've mentioned compounding before but wanted to come at it from a different angle. When planning for the future err on the side of conservatism in your assumptions. Otherwise you are setting youself up for grave disappointment.

Here are some different compound rates to consider. Look at what a little difference in compound rate can do to the bottom line. A 9% return leaves you with less than half of the pile of money earned at 14%, the compound annual rate anybody tracking the broad market received the last 20 years of last century. That's a reality check.

$100,000 compounded annually for 20 years at:

Annual Rate	Future Value
3%	$180,611.12
6%	$320,713.55
9%	$560,441.08
12%	$964,629.31
14%	$1,374,348.99
17%	$2,310,559.92