Albert Einstein is said to have stated, “the most powerful force in the universe is compound interest.”
Even if that quote isn’t Einstein’s, he’d be happy to take credit for it because if there’s one thing worth understanding – it’s the power of compound interest or compounding investments.
In January last year, Grace Groner of Lake Forest, Illinios, passed away at 100.
A great innings, but you’re probably wondering why Grace, who lived and died in the USA, should make news in Tasmania?
Grace lived a frugal life; an orphan at 12, going on to work as a secretary for 43 years at Abbott Laboratories.
But she passed away leaving $7 million to her school, Lake Forest College.
How did she do it?
Grace purchased three shares of Abbott Laboratories in 1935 for $60 each; she continued to reinvest the dividends and never sold them.
Luckily for Grace, her employer, also the company she invested in – was one of the top ten equity performers of the last fifty years on the US market.
However, taking the same strategy and investing in US small cap shares, Grace’s return could have been as high as $10.5 million, so this story isn’t as extraordinary as it seems.
This highlights another crucial point, the importance of returns achieved.
The annualised return for Grace’s investment was 15.13%, for US small cap shares it was 15.75%.
Yet a mere .62% annual difference amounted to nearly $3.5 million extra in investment returns.
Not that either return should be sneezed at, especially growing from $180, but it does show the impact of even a small percentage difference over the longer term.
Often that small percentage can easily be found in the form of higher fees on a portfolio.
Even if your investments are nicely compounding away, look out for unreasonable fees eating away at potential growth.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. If you’d like help with your financial future, we might be Australia’s best financial planner. We think we’re Tasmania’s best financial adviser and
