Compounding returns refers to the process of earning returns on both your original investment and the returns that have been reinvested. In simple terms, it’s when your investment generates earnings, and those earnings are reinvested to generate even more earnings over time. This creates a snowball effect, where your wealth grows at an accelerating rate.
The power of compounding is especially strong over long periods. Even modest investments can grow significantly if left to compound for years. For example, if you invest £1,000 at a 7% annual return, after one year, you would earn £70. If you reinvest that £70, the next year, you’ll earn 7% n...