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The best investment to put compounding to work in

by , 31 July 2015

By reinvesting any return you receive from an investment, you can benefit from the power of compounding.

Compounding provides you with a way to let your money snowball over the years.

So which asset does compounding work best with?

Read on to find out…

How best to make use of compounding

Compounding works at its best with shares.

You can see this with a study Professor Jeremy Siegel of the Wharton School at the University of Pennsylvania did.

He looked at the returns of a variety of different asset classes over 210 years.

He discovered that over the period 1802 to 2012:

  • $1 in cash would be worth 5c by 2012.
  • $1 in gold would be worth $4.52 by 2012.
  • $1 in US government bonds would be worth $281 by 2012.
  • $1 in bonds would be worth $1,778 by 2012.
  • And $1 in shares would be worth $704,997 by 2012.

T worst performer was cash. It fell in value to 5c. By far the best performer were shares, which grew the initial investment to $704,997.

When it comes to long-term investing, shares are the best way to generate long-term wealth. Yes asset classes like cash and bonds do have their place in your overall strategy, but for wealth building, investing in shares is key.

And if you’re thinking investing for over 200-years isn’t very likely given your life expectancy, Professor Siegel looked at investing for 54-years.

He discovered that $3,000 invested in the S&P 500 between 1950 and 2003 would generate a return of $1,323,936. Rather impressive.

How to benefit from compounding by investing in shares

If you want to build a long-term portfolio to let the power of compounding work its magic, invest in essential shares on the stock market.

These include companies that specialise in food, healthcare, and fuel and other defensive shares that provide products or services people can’t live without.

You also want to invest in shares that have enduring competitive advantages, Mark Ford in Creating Wealth explains. This means focusing on shares that possess strong brands and are the best performers in their sector.

Ensure your investment strategy includes a long-term portfolio that can take full advantage of compounding.

So there you have it. The best investment to put compounding to work in.

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The best investment to put compounding to work in
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