Compound

The very implication of my estimation yesterday may skip your eyes.

You see? The traditional wisdom of Albert Einstein was: The greatest force in the universe is compound interest. Yes, mathematically that’s absolutely correct. But, when we extrapolate and believe we could accumulate an amazing wealth by continual re-investment, we are deceiving ourselves.

The real thing that grows in an amazing rate with time is inflation.

And, for that reason, it damps down our real investment return by an unbelievable magnitude.

For example, if you have $100,000 to start with and an investment return of 5% per year, thirty years later it becomes $432,194. Not bad.

But, if the inflation rate was 4% all through the time, the investment return becomes 1% per annum. The money that you have thirty years later would be $134,784 – more than a three-fold difference.

The conclusion is, once again, simple: We invest, not because we want to become rich (alas, we do want to), but because we need to counteract the exponential force of inflation, which wears down the money in our pocket in an astonishing speed.

PS. Of the above example, strictly speaking, the money in your account thirty years later would be numerically more than $134,784 because of inflation, but the purchasing power would be the same as what you have with $134,784 at present.