in Trader University

The Magic of Compounding on Your Returns

When I was a teenager I was fascinated with compounded return tables. They seemed like magic to me, at some point in the future I could build up my capital to the point where it made more than I did. If I managed my capital correctly and could just return 12% a year it would double at the end of the sixth year. If I could really knock it out of the ball park and return 20% a year I was looking at a double at the end of four years. The key would be to figure out how to do get these returns through the stock market and how to get the capital in the first place. I would sell my time for work and then put that money to work to save me time in the future. I have been fortunate to make my teenage dreams come true and create this compounding in my accounts over the past 20 years. For me capital preservation is the key and then grinding out 15%-20% returns a year can really work magic over just a few years, throw in a few 40% and 50% return years in great trending markets and you can really have something quickly. When you get into the six figures in your personal accounts 1% of capital is over $1,000 and this gives you amazing firepower in your trading. If you have never pondered the power of compounding a trading/investing account for capital appreciation please give this chart a glance. It is possible to be a millionaire in a reasonable amount of time if you leave your capital alone to grow.  This is a program that anyone can get on with a simple trend following method using an index and moving averages it is not rocket science. Also doing this inside a tax deferred account like a 401K, 403B, or IRA eliminates the capital gain taxes and lets you compound away from the tax man. They key is to start young and start to build it very early so time is on your side. Once you get into the six figures the acceleration of the growth is amazing. We all have a chance to build real wealth through compounding our returns through trading and trend following and allowing it to grow.