Have you ever wondered why the rich keep getting richer? It has a lot to do with compounding. This is where your money makes more money when you are doing nothing.
For example, you have R100 000 in a unit trust fund which is invested in the stock market. That year the market increases by 10%. That means you have made a R10 000 return. Nice money, but not that exciting.
Now if you have R1 million rand invested in exactly the same fund, and received exactly the same 10% return, you would have made R100 000. So the more money you have, the more you make.
The problem is that if we keep cashing in the R100 000 because we don’t think that is a lot of money, we never get to the million rand which could make us a lot of money.
This is why compounding is so powerful, especially when it comes to your retirement funds which you invest over a long period of time. The longer you invest, the more time your money has to benefit from compounding.
Over the last 20 years, the average performance of the JSE Top40 has been 12.65% per annum. That is the performance of the 40 largest companies in South Africa but they account for about 80% of the whole Johannesburg Stock Market.
Compounding R100 000 into R1 million
If in 2002 you had invested R100 000 into the Satrix Top40, which is a fund that gives you the average return of the Top40 index, that would now be worth just over R1 million.
Even over the last ten years, which has included some weak market returns, the average return has been just under 12%. If you had invested R100 000 in 2012, your R100 000 would have tripled to R305 000.
So don’t think R100 000 is not a lot of money, especially when it come to your retirement fund – it just needs time to grow.