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The power of compounding
Earn returns on your returns — and watch your wealth grow

If you're investing with time on your side, then compounding is a powerful tool for creating long-term wealth. By earning returns on your returns, you can build a surprisingly large portfolio with only a small contribution upfront.

The sooner you start, the more your returns will multiply. For example, a 21-year-old investing $5,000 in a managed fund today and earning returns of 8% a year would have over $147,000 in today's dollars if they retired at 65.

Compare that to a 50 year old investing the same amount with the same returns. In the 15 years to retirement, they would only have accumulated around $15,800. That's why it can make sense to start investing now, even if you only have a small amount to invest.

Three ways to make compounding work for you

  1. Reinvest your income. Start by asking your fund manager to reinvest your investment earnings, rather than taking them in cash.
  2. Use a regular investment plan. By investing in your managed fund every month, you can build up a sizeable nest egg surprisingly quickly. You can also take advantage of a strategy called dollar-cost averaging to lower costs and accelerate returns. And by setting up a direct debit or an automatic funds transfer as soon as you're paid, you can create a set-and-forget investment strategy that keeps on working year after year.
  3. Put time on your side. The longer your money can work for you, the better compounding works. Here's an example of how time increases the multiplying power of compounding.

The power of compounding: $5,000 earning 8% year

Return for the year % of original investment Current value
Year 1 $400 8% $5,400
Year 10 $800 16% $10,795
Year 25 $2,536 51% $34,242
Year 40 $11,822 236% $147,780

Next steps

  1. Learn about dollar cost averaging.
  2. Choose a risk profile.

Switch and save

It only takes minutes to switch your existing managed funds to InvestSMART, but you can enjoy the savings year after year:

  1. Fill in our fast online form.
  2. Print the form, then sign it and send it by:

    Email

    admin@investsmart.com.au

    Fax

    1300 880 260

    Mail

    InvestSMART Financial Services Pty Limited
    Reply Paid 4477
    Sydney NSW 2001
  3. You'll start saving straight away. And once every year, on the anniversary of when you switched to InvestSMART, you'll receive your trail commission rebate, either as a cheque or via electronic fund transfer (EFT).
  4. To receive your TrailCap payments via electronic fund transfer (EFT) to an Australian bank account — just complete the EFT section in the online application form.
    If you have already nominated InvestSMART as your fund broker and have been receiving TrailCap cheques from us but would rather your money is deposited directly into your bank account, you can let us know your EFT details in the InvestSMART EFT payments form.