The Amazing Benefits of Compound Interest – and Why Staying the Course Is Key

11th October 2024
There is a much-rumoured quote from Einstein that "Compound interest is the eighth wonder of the world." While we may never know if he truly said it, the sentiment certainly holds true. Compound interest can be a game-changer in the journey to achieving your financial goals, making it a cornerstone of our advice here at Brigantia Private Wealth Management. Understanding and harnessing the power of compounding can be the difference between a good financial outcome and a truly great one.
But what makes compound interest so special, and why is it crucial to stay the course over your investment time horizon? In this week’s blog, we’ll explore these points and explain why defining your goals, designing a strategy, and sticking to it is the best path to financial success.
What Is Compound Interest?

At its simplest, compound interest is the process of earning returns on your returns. Unlike simple interest, which pays you a fixed amount based solely on your original investment, compound interest allows the earnings from your investment to be reinvested and earn further returns themselves. The effect of this over time can be substantial, as your investment starts to grow exponentially, creating what is often referred to as a "snowball effect."

Let’s consider an example to illustrate this powerful concept. Suppose you invest £100,000 over 20 years, achieving a net return after costs of 8%.

Without compounding, you would simply earn 8% each year on your original £100,000, resulting in a total value of around £260,000. However, when compounding is included, that figure grows to an impressive £466,095. The difference is striking and demonstrates how compounding can multiply your wealth over time.
The Importance of Staying the Course

One of the most important aspects of wealth management is educating clients about the long-term nature of investing. A well-crafted investment strategy isn't just about picking the right funds or timing the market—it's about having the discipline to stay the course and allowing the power of compounding to work in your favour. Many investors start with great intentions, but the temptation to make changes or dip into investment funds early can undermine the end results.

When clients withdraw from their investments before the plan’s end, the effects on compounding can be significant. A premature withdrawal doesn't just remove capital from the investment pool; it also reduces the future returns that those funds could have generated. For example, taking out £10,000 today could mean forgoing thousands more in potential gains down the road.

Similarly, frequent changes to an investment portfolio, driven by market fluctuations or attempts to time the market, can also limit the power of compounding. Trading costs and fees add up, reducing the amount of capital available to benefit from compound growth. Each time money comes out of the pot, it limits the cumulative effect of compounding, potentially leading to a lower end value than if the investment had remained untouched.
Why Professional Advice Makes a Difference

We’ve said it before, but it’s worth repeating: wealth management and financial planning are essential, no matter how experienced you are in the markets or how confident you feel about managing a portfolio through a retail broker account. There is a significant difference between merely holding investments and following a structured, goal-oriented financial plan.

At Brigantia Private Wealth Management, we focus on helping our clients define their goals early, design a strategy tailored to their unique needs, and—most importantly—stay laser-focused on the plan. Our expertise helps keep you grounded during periods of market volatility, ensuring that short-term decision-making doesn’t derail your long-term success.

We understand that it’s easy to become distracted by the noise of market movements or tempted by the allure of new investment opportunities. But our role as wealth managers is to keep your focus on the bigger picture. By maintaining a disciplined approach and allowing compounding to do its magic over time, you can maximise your chances of achieving your financial goals.

The Bottom Line: Patience Is Key

The power of compound interest is one of the most remarkable forces in the world of finance, and it’s why we strongly advise our clients to think long-term. It’s not enough to simply invest; the real key is to invest wisely and have the patience to let time do the heavy lifting. For those who stay on course and resist the urge to make impulsive changes, the rewards can be significant.

If you’re ready to take the next step in your financial journey, why not book an initial chat with one of our expert wealth managers? Click the link below to find out more about how we can help you define your goals, design a strategy, and stay on course to reach them.