How to maximise your compounding returns

Building wealth can depend not only on how much you invest, but also on how effectively your investments grow over time. Compounding returns are key to this process, with the cumulative effect of compound interest turning even small contributions into significant financial growth over time.

What are compounding returns?
Compounding returns represent the exponential growth of an investment over time by earning "returns on returns." Unlike simple returns, which apply only to the initial principal, compounding adds the gains from prior periods into the calculation. This accelerates growth, especially over longer investment horizons.

How compounding works
Let’s say you start with $1,000 and earn a 10% return annually – in the first year, you’d add $100 to the principal. But in the second year, the same 10% return would apply to $1,100, generating $110 for a total of $1,210. And pretty soon, the return you’ve accumulated has actually outgrown the money you invested in the first place.

Compounding returns are shaped by several factors, including your time horizon. For example, if you begin with $10,000 at an 8% annual return, you’ll have about $21,600 after 10 years. But over 30 years, the same investment grows to $100,600, due to compounding.

Consistently adding to your investments also accelerates the compounding effect. For example, contributing $500 monthly to a portfolio with an annual 8% return results in $750,000 in 30 years.

Power up your compounding

• Start early – the earlier you start investing, the more opportunities your money has to grow and benefit from compounding returns.
• Choose investments with long-term growth potential, such as stocks or ETFs.
• Reinvest earnings – continuous reinvestment allows your returns to generate “returns on returns”, creating exponential growth.
• Automating your investments ensures consistency and keeps you on track.
• Costs and fees reduce the compounding effect, so consider low-cost investments such as ETFs or index funds.

Compounding allows your portfolio to grow steadily, and even modest initial investments can expand exponentially when combined with time and reinvestment. For instance, someone who starts investing $200 monthly at age 25 can accumulate more wealth by retirement than someone who starts at age 35, even with the same contribution rate.

Put compounding to work with AutoInvest
AutoInvest, Saxo’s hands-free monthly savings plan, is a simple way to put the power of compounding to work for you. With AutoInvest, you can start building your wealth with automated monthly investments in your choice of low-cost ETFs. And with zero commissions to buy, no monthly fees and no minimum deposit, you can keep costs low and start investing with as little or as much as you like.