Compounding also applies to dividends and capital gains on investments when they are reinvested. The following illustration and questions give you a first-hand opportunity to calculate the impact of time on the value of your investment accumulation. Please complete the exercise below before moving ahead to the next section. Compare the total contributions and the total value at retirement of the two investments. This example assumes a 9 percent fixed rate of return, compounded monthly.
All interest is left in the account to allow interest to be earned on interest.
The answers to questions 1 - 7 can be found at the end of this unit. Note that Investor A, who invested much less than Investor B, has a much higher nest egg at retirement age, because of a 10-year head start. As you can see from this example, compound interest is especially magical when money is steadily invested and left to grow over a long period. In the final analysis, your overall investment return will be closely associated with the asset categories and allocations that you select. An investor's group of investments, frequently called an investment portfolio, can be divided in numerous ways among stocks, bonds and cash management options.