The Power of Compounding


I recently took the family down to Naples, Florida for some vacation time.  On one afternoon we took the kids on a boat cruise around the harbor with the goal of seeing some dolphins (which we saw!).  After explaining some of the history around the harbor, the tour guide quickly moved the conversation to real estate as we passed some very large homes in the Port Royal neighborhood.  The home lots in Port Royal go for about $5 million and the homes have values up to about $50 million.  It’s a nice neighborhood!

Apparently, in 1930 a wealthy east coast real estate developer bought all of the land that is now Port Royal.  He parceled out the land into smaller lots, then encouraged the east coast elite to come to Port Royal and build their winter homes – which they did.  The lots were originally sold for about $15,000 each.  When announced, this figure was met with “oohhs” and “ahhhs” from the crowd – “15 grand to 5 million – what a great return on investment!”

What do you think the annualized return is on this investment ($15k to $5MM in 87 years)?  Here are your choices:

A: about 7%

B: about 10%

C: about 12%

D: about 15%

When looking at small dollar amounts that grow to larger dollar amounts, the trick is to look at the amount of time the investment has to grow.  The time frame here is 87 years – that’s a long time!  Many investors start saving in the their 30’s with the goal of retiring in their 60’s – the Port Royal investment time frame is almost three times as long!

The answer to the question is “A”: 6.91% is the annualized investment return in this scenario*.

This example highlights a few things.  For one, you have to STAY invested to let your money compound.  Think of all the negative “events” that took place from 1930 to today.  Multiple recessions.  Multiple wars.  Massive inflation.  You name it.  There were lots of good reasons to sell the land, but the power of compounding rewarded holders of this land over time.

Another point: you do not need an amazing investment opportunity to grow your money over time.  Investing in the next “Apple” or “Uber” would be great, but you do not need a “home run” to grow your money.  What you do need is a reasonable rate of return and TIME to let it compound.

Charles Brown is a Portfolio Manager and Financial Advisor at M. Brown and Associates in Naperville, Illinois

* Equation: Future Value = Present Value (1+interest rate)^years

**The above article is informational in nature only and is not a recommendation to buy or sell securities.  All information is gathered from sources believed to be reliable, but neither Charles Brown nor Ausdal Financial Partners, Inc guarantees the accuracy of the information.  All investments carry a degree of risk.  Individuals should consult with their tax and investment professionals before making changes to their investment portfolios.

***Securities and Investment Advisory services offered through Ausdal Financial Partners, Inc, 5187 Utica Ridge Road, Davenport, IA 52807 (563)326-2064. Member: FINRA/SIPC. M.Brown and Associates and Ausdal Financial Partners are independently owned and operated