Exponential growth can transform modest amounts into substantial wealth over time.
What’s interesting is that 20% returns don’t just grow to be twice as large as 10% returns, due to the exponential nature of compounding. Let’s compare these returns over 10, 20, and 30 years to explore this phenomenon.
10% Annual Compound Returns
- 10 Years grows to 2.59x of the original amount.
- 20 Years grows to 6.73x of the original amount.
- 30 Years grows to 17.45x of the original amount.
20% Annual Compound Returns
- 10 Years grows to 6.19x of the original amount.
- 20 Years grows to 38.34x of the original amount.
- 30 Years grows to 237.38x of the original amount.
Comparing The Returns
To understand the growing disparity, let’s calculate the ratio of the 20% return to the 10% return at each interval:
- At 10 Years, the difference between 20% returns and 10% returns is a little more than double (2.39 = 6.19 / 2.59).
- At 20 Years: 20% returns are 5.70 times larger than 10% returns.
- At 30 Years: 20% returns are 13.60 times larger than 10% returns.
Compounding is Exponential
Each year’s interest builds on the prior year’s total, magnifying the impact of the higher rate. The longer the period, the more pronounced the difference.
A 20% compound return vastly outstrips a 10% return over time. After 30 years, a $10,000 investment at 20% grows to over $2.37 million, while at 10%, it reaches $174,494. This demonstrates the extraordinary power of higher compound returns for long-term wealth creation.
-Paul R. Rossi, CFA