The Power of Compounding | American Funds

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Investing Fundamentals

The Power of Compounding

Time is your ally when it comes to investing.

Compounding means earning investment returns on previous investment returns. The longer your investment horizon, the more time your investment has to reap the advantages of compounding.

For example, say you put a hypothetical $10,000 in a mutual fund that earns 8% each year. By the end of the first year, the account would be worth $10,800. If the $800 in earnings were reinvested, the account would be worth $11,664 by the end of the second year. The extra $64 earned on the $800 return from the first year shows how earnings compound.

Over time, that reinvested money increases the size of your principal and earns even more. In fact, the value of compounded investment earnings can eventually become far greater than your contributions over the long term. This growth allows even small investments to increase in value over time and helps to offset the impact of inflation, which can erode real returns on investments.

Growth of $10,000 Over 5, 15 and 25 Years (All Earnings Reinvested)*

*Assumes growth rate of 8%, compounded annually.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. 

Hypothetical results are for illustrative purposes only and in no way represent the actual results of a specific investment.