The Power of Compounding: Why Time in the Market Beats Timing

What is Compounding?

I am very sure you have come across the phrase, “let the money work for you”, this is exactly what compounding is all about. It can be compared to having a financial assistant helping you push your money hence growing it faster as time goes by. It therefore means interest applies not just to the initial principal of the investment you make but also to the accumulated interest from the previous times. It does not matter if you are just beginning your financial journey, or are looking to improve your savings strategy, understanding compound interest can change the way you think about building your financial growth. This is different to the common simple interest people understand where you only earn interest on the money you started the investment with. 

To understand this, let's use an example:

Simple Interest

You make a Ksh. 100,000 deposit and set to earn 15.51% yearly. After five years, you will have a total of Ksh. 177,550.

Compound Interest

With an investment of Ksh. 100,000 into the Ndovu Money Market Fund, Ndovu Fund, with an interest rate of 15.51% annually. Since the deposit has a compounding interest, the total amount will be Ksh. 205,535.42. 

It is clear that compounding earns you more on your deposit and is the best way to grow your wealth and Ndovu is one of the best platforms to grow your money through compounding.  

The Success of Compounding

The globe's most successful investors credit a majority of their success to the power of compounding with the most famous of them all Warren Buffet indicating his life is a product of compound interest. Warren Buffet is currently 94 years old meaning he has been in the game for a long period a crucial element to his wealth creation compared to his renowned stock picking. He had understood how to avoid the traps a majority of investors fall into by being patient and purchasing assets with a margin of safety. 

The goal is to deliver significant earnings growth over time, but that growth will come in fits and starts.

What is the Rule of 72?

The Rule of 72 is a heuristic utilized in determining how long an investment will double in value in the case of compounding interest. It states that the number of years it will take to double is 72 divided by the interest rate. For example, To calculate how long it will take to double your money with an annual interest rate of 15.51%, you can use the Rule of 72. The rule states that you can divide 72 by the annual interest rate (expressed as a percentage) to estimate the number of years it will take to double your money.

In this case:

72

Years to Double= 15.51

4.64 years.

So, it would take approximately 4.64 years to double your money at an interest rate of 15.51% annually.

Let us consider some simple math, how long does it take to double your money?

Annual Interest (%)	Years to Double Your Money
1	69.7
2	35
5	14.2
6	11.9
10	7.3
15.51	4.6
20	3.8
30	2.6
50	1.7
75	1.2
100	1.0

Doubling your money within a year would involve taking a high level of risk and that could be close to even gambling. However, doubling your money over ten years is much more reachable. You just need a return of more than 7% annually. With the different products available at Ndovu, the Gold Fund last year's return was 40.36%, Microchip at 70.26%, and The Techie at 42.41% last year's return too. These are just a few of the products Ndovu has for you to invest in and they all come with their fair share of risk. Ndovu does classify the risk level involved in these funds to make your decision-making much more informed prior to investing. Download the Ndovu app now on Google Play and App Store and start your compounding journey.

How to Invest with Compounding?

In your investment journey, the application of compounding is a basic Buffett principle of buying quality businesses and compounding their own cash flows to ensure growth while still enjoying a wide moat that buffers you from disruption and competition. It could also mean applying valid diversification by spreading your money across many different businesses and asset classes. By doing this, when you are a victim of volatility which is inevitable, you get to stay in the game rather than being stricken out. In simple terms, it means going for simple singles in comparison to taking a big swing and missing the mark. 

What wins between compound interest and Inflation?

Resolving the risk dilemma is not an easy problem to solve. Economizing on small returns will not consistently beat prices and your wealth will not grow in real terms. The unfortunate reality is that inflation does have the irritating habit of compounding too. To beat inflation persistently, you need to diversify your investments to include those that pay higher long-term returns without necessarily taking on excessive risks. It does not mean elimination of losses, but just limiting them and allowing a slow and steady approach to work provided adequate time. 

Disclosure:

 Ndovu is a regulated Robo-advisory platform operated by Ndovu Wealth Limited (‘NWL’). NWL is a fund manager licensed by the Capital Markets Authority (Kenya).

The information provided on this platform and the products and services offered are intended solely for persons in regions and jurisdictions where such distribution and utilization are in accordance with local laws and regulations. Ndovu does not promote its services in regions where it lacks the necessary licenses; It is exclusively available to persons residing in countries where it holds a valid license or has regulated partners. Ndovu does not extend its services to citizens of the United States, Canada, Japan, and other restricted territories.

Disclaimer:

All ETF products are subject to risk, including country/regional, liquidity, and currency risks. Market prices of securities within the ETF may rise and fall, sometimes rapidly and unpredictably.

While ETFs provide diversification through exposure to a basket of securities, they do not eliminate the risk of loss. Diversification does not ensure a profit or protect against a loss. These are non-cis products and are registered by the SEC.