Never interrupt compounding unnecessarily.
- Charlie Munger, first rule of compounding
Compound growth happens in proportion to the principal during each compounding period. Early on, the principal is small. As the growth compounds over time, it increases the principal. Later on, the same growth percentage results in substantially more growth, as it is growing based on a larger principal.
This principal applies to all compound growth systems. Continuing to grow the principal is most meaningful when the principal is larger. Since the principal gets larger with each passing period of compound growth, the most growth occurs at the end.
10% growth on $1,000 is only $10.00. 10% growth on $100,000 is $1,000. It takes 49 compounding periods to get from $1,000 to $100,000.
To put that growth into perspective, after 25 compounding periods of 10% growth, the growth per period exceeds the initial invest. Another 24 periods later, the new principal from each period’s growth generates more new growth in a single period than the size of the initial principal.