Introduction

If there is “one thing” investors should know about investing, it’s the power of compound interest or returns. In the ever-rising obsession with short-term developments impacting investment markets around the economy, interest rates, profits, politics, etc, it’s often forgotten about. It can be the worst nightmare of borrowers as interest gets charged on interest if debt is not paid down. But it’s the best friend of investors. The well-known Australian economist Dr Don Stammer refers to it as “magic”. Unfortunately, research by AMP shows many don’t understand the concept, particularly younger Australians with 2 out of 5 men under 40 responding in a survey that they don’t understand it and 2 out of 3 women. This is unfortunate as it’s when you are young you can make the most of it. Given its importance, this note has another look at what it is, how it works, various issues around it and why investors often miss out.

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