A Few Things Everyone Should Know about Investment Returns and Retirement
The most powerful force in the universe is compound interest.
If we could ask him, Einstein would certainly agree that other forces interact with compound interest and affect its power. If you are going to achieve good investment results, it is important that compound interest work for you, that it work for you consistently, and that it work for a long time. Most investments do not generate high long-term compound returns. The significance of variability in compound interest rates is well-illustrated by looking at everyone’s favorite example of what compound interest can do: calculations of the twenty-first century value of the beads and trinkets used to purchase the island of Manhattan in 1626.
The gullible Dutch purchasers dealt with a group of Native Americans who probably did not have a legitimate ownership claim on the island. Apart from the issue of title to the property, the Dutch also failed to hold onto the island—illustrating the difficulty of keeping your investment working for you for a long period.
Investment risks aside for a moment, the calculation of what compound interest can do over a long period is interesting. The original value of the beads and trinkets has been variously estimated from $16 to $162. Based on the $162 estimate, one observer has calculated the value of the original payment in 2006 at various compounding rates, as follows:191