Investing Basics: The Power of Compounding

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      Lesson summary:

      Compound interest is reinvesting earned interest back into the principal of an investment, leading to exponential growth over time. Time is an important factor in compounding, as demonstrated by two scenarios showing the difference in returns between an investor who withdrew interest every year and one who reinvested for 30 years, and between two investors with portfolios worth $100,000 each who saved an additional $10,000 each year with 7% growth, with one retiring in 15 years and the other in 30 years. To harness the power of compounding, start investing early, reinvest earnings, and avoid excessive risks. Allocating the portfolio across different asset classes and diversifying within each class can help reduce risk, but there is no guarantee of profit. A slow and steady approach to compound interest is recommended.

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