presentation Wealth Insights | June 23, 2026

Compound Interest: ‘The Eighth Wonder of the World’

Written by Luca Delpippo

Compound Interest: ‘The Eighth Wonder of the World’

Compound interest is commonly believed to be what Einstein referred to as ‘the eighth wonder of the world’ and whilst this quote may be erroneously ascribed to the groundbreaking theoretical physicist, it is not difficult to understand why this quote has stuck around. Compound interest is definitely a wonderful thing and as human beings, we aren’t necessarily hardwired to appreciate the effects of compounding over time. Compound interest is one of the key reasons that time in the market is a better driver of returns than timing the market, and why having a long investment time horizon is a luxury we should capitalise on.

What is Compound Interest?

In simple terms, compound interest is used to describe the effects of interest (or growth) earned on both one’s original investment and previous interest. For those a bit more mathematically minded, the formula for compound interest can be shown as the below:

Where:

A = Final amount (after interest)

P = Principal (initial amount invested/borrowed)

r = Annual interest rate (in decimal form, e.g. 5% = 0.05)

n = Number of times interest is compounded per year

t = Time (in years)

Another way we can think about compound interest is simply as reinvesting our yield or our growth on our investments. Using a simple figure of an investment of $1MM over twenty years, we can see in the below graph the difference between compounding interest and simple interest (where in the latter, we do not reinvest interest previously earned, but instead take the interest earned out of the investment/portfolio):

 

Source: MASECO; figures are nominal.

We can see that in the early years of our investing journey, compounding does provide an upside, albeit a small one (by year 5). By year 20 however, our investment has appreciated close to 33% more than where we would be had we kept our $1MM paying out each year and not reinvesting the 5% yield.

Real Life Applications

A more ‘rule of thumb’ way of thinking about compounding in reverse is the so-called ‘rule of 72’ whereby we take our assumed annualised rate of growth (5% in the above example) and divide 72 by that number in order to work out how many years it would take for our initial investment to double. By no means an exact science, it does however tell us the importance of compounding. Our investment doubles in as little as 14 years when we compound our growth but takes 20 years if we don’t.

Where we find the effects of compounding to be particularly relevant, and often surprising to our clients, is when we come to think about retirement planning for younger clients, who have uniquely long time horizons. Some of the key takeaways (by no means an exhaustive list) in this regard are:

  1. It’s never too early to start: Time is very much your friend in investing and a big reason for that is the effect of compounding growth.
  2. Avoid timing the market: Investment returns are not as smooth and consistent as 5% p.a. year-to-year in reality. Timing the market can be costly and the effects of doing so have an outsized impact on your future growth because of compounding.[1]
  3. Inflation is the thief that comes in the night: We might not feel the effects of inflation on a day-to-day basis or even fully comprehend the compounding effects of inflation over a very long time horizon, but we are all exposed to this particular risk, especially over a long time horizon. Compounding growth can be an important step in mitigating this risk.

Final thoughts

It is a difficult task to condense the effects and applications of compound interest into a single article, but it is a crucial concept to understand, in particular when investing for the long term. Remembering the power of compound interest/growth when investing for the long term can be a great tool against focusing on the news of the day when making investment decisions. The earlier we start in our investment journeys, and the more consistent we are, the more we theoretically have to gain.

The Legal Stuff

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[1] Our communication from April 2025, around so-called ‘Liberation Day’ is worth a read: https://masecoprivatewealth.com/staying-calm-in-turbulent-markets/