The Power of Compound Returns

If there’s one concept that separates people who build wealth steadily over time from those who constantly struggle to stay ahead, it’s understanding the power of compound returns. Most people focus on how to make quick gains in the stock market—looking for the next big trade, meme stock, or breakout trend. But those who take a step back and allow their investments to grow over decades are often the ones who end up the wealthiest.

What Is Compound Interest—and Why Is It So Powerful?

At its core, compound interest means earning interest on your original investment and on the interest you’ve already earned. It’s money that builds on itself over time, growing not linearly but exponentially. This is the magic that turns even small, consistent investments into large sums over decades.

Here’s a simple example:
Suppose you invest $10,000 at an average return of 7% per year. After one year, you have $10,700. If you reinvest that gain, the next year you earn 7% on $10,700—not just your original $10,000. That might seem like a small difference, but over decades it compounds into a fortune.

Here’s how that $10,000 would grow over time at 7% annual returns:

• 10 years: $19,672

• 20 years: $38,697

• 30 years: $76,123

• 40 years: $149,745

• 50 years: $294,570

You didn’t double your money in 10 years—you nearly tripled it in 20, octupled it in 40, and saw 29x returns in 50. That’s the power of compounding.

Now add dividends into the mix. Many companies pay a portion of their profits to shareholders as dividends. When you reinvest those dividends (i.e., use them to buy more shares), you increase the number of shares you own—so your compounding accelerates. Over time, dividends can account for a massive chunk of your returns. For example, from 1926 to 2022, dividends have represented nearly 40% of the S&P 500's total return.

Historical Data: Long-Term Beats Market Timing

One of the most compelling cases for long-term investing is found in historical data. Over the past century, the U.S. stock market has gone through wars, depressions, recessions, pandemics, and political upheaval—but it has continued to trend upward.

Let’s look at some data from JPMorgan Asset Management that tracked the S&P 500 from 2003 to 2022:

• An investor who stayed fully invested would have turned $10,000 into about $64,844.

• An investor who missed the 10 best days in the market? Only $29,708.

• Missed the 20 best days? Now it’s just $18,235.

• Missed the 30 best days? You’re down to $12,780.

Here’s the kicker: Six of the ten best days occurred within two weeks of the ten worst days. That means trying to jump out of the market when things look scary often means missing the rebound.

Timing the market is incredibly difficult. You have to be right twice: when to get out and when to get back in. Most people get one—or both—wrong.

Legendary Investors Who Benefited from Time

Let’s take a look at real-life investors who harnessed the power of long-term investing and compounding:

Warren Buffett

Buffett’s returns are impressive, but what’s more impressive is how long he’s been investing. He started buying stocks as a kid and has been investing for over 75 years. According to Morgan Housel’s book The Psychology of Money, 99% of Buffett’s net worth came after his 50th birthday. And over 96% came after he turned 60. Why? Because of time.

He’s not just a great investor—he’s a great long-term investor.

Ronald Read

He was a janitor and gas station attendant in Vermont who lived frugally and quietly invested in blue-chip dividend stocks for decades. When he passed away in 2014, he had an $8 million fortune—nearly all of it earned through long-term investing. He never earned a six-figure salary. His portfolio wasn’t fancy—it was filled with companies like Procter & Gamble and Johnson & Johnson. The secret? Decades of compounding and reinvesting dividends.

Anne Scheiber

Another amazing example is Anne Scheiber, a former IRS auditor who retired with $5,000 in the 1940s. Over the next 50 years, she turned that into $22 million through smart, consistent investing in high-quality companies and reinvesting dividends. She lived modestly and let her investments do the work.

These stories prove you don’t need to be rich, famous, or a finance guru to win with investing. You need time, patience, and discipline.

Why Starting Early Is Critical

When you start investing has a bigger impact than how much you invest. Thanks to compounding, starting early—even with small amounts—can outperform large contributions made later.

Let’s compare two investors:

• Investor A: Starts investing $5,000 per year at age 25, stops at 35 (10 years, $50,000 total invested).

• Investor B: Starts at 35, invests $5,000 per year until age 65 (30 years, $150,000 invested).

Assuming 7% returns:

• Investor A ends with $602,070 at 65.

• Investor B ends with $540,741.

Even though Investor B invested three times as much money, they ended with less—because they started later. That’s the exponential magic of compounding in action.

This is why parents often open investment accounts for their kids, or why financial planners push young professionals to start saving in their 20s. Time is your greatest advantage. Every year you delay investing makes a huge difference decades down the line.

Time in the Market vs. Timing the Market

It’s natural to want to “protect” your portfolio during downturns, but study after study shows that time in the marketalmost always beats trying to time the market.

From 1980 through 2022, the average intra-year drop in the S&P 500 was 14%. Despite that, the market had positive annual returns in 32 of those 43 years. Investors who bailed at the first sign of trouble likely missed out on the year-end rebounds.

Here are a few more reasons why staying invested works:

• Volatility is normal: Pullbacks of 5-10% happen multiple times a year. Corrections (10-20%) happen every few years. Crashes (20%+) are rare, but they happen. The key is staying calm and invested.

• The market recovers: After every crash in history, the market has eventually recovered and gone on to hit new highs.

• Missed gains hurt: As we saw earlier, missing just a handful of the market’s best days drastically reduces your returns.

The problem is that most people want certainty. But markets don’t offer certainty—they reward patience. If you wait for perfect conditions to invest, you’ll always find a reason to hold back. Meanwhile, others who accepted short-term volatility will be quietly compounding their wealth.

Key Takeaways: How to Put This Into Practice

1. Start early – Even small amounts can grow into large sums if you give them enough time.

2. Stay invested – Don’t try to time the market. Missing just a few good days can destroy your returns.

3. Reinvest dividends – Let your portfolio grow not just through price appreciation but through reinvested income.

4. Focus on quality and time – You don’t need to chase high-risk investments. Consistency wins.

5. Ignore the noise – The media thrives on fear and sensationalism. Successful investors stay focused on the long term.

If you're looking to build wealth, there’s no strategy more effective—and more accessible—than long-term investing and letting compound returns work for you. It doesn’t require timing the market, predicting crashes, or chasing trends. It just requires discipline, patience, and consistency.

Most people overestimate what they can achieve in one year and underestimate what they can achieve in 30. The earlier you begin and the longer you stay invested, the better your outcomes.

Compound returns aren’t just a mathematical formula—they’re a life philosophy. A reminder that small, smart actions done repeatedly over time can lead to extraordinary results.

In the end, the secret to wealth isn't finding the perfect investment. It's giving your money enough time to grow.

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.