Professor Burton Malkiel of the Rebalance Investment Committee on how compounding leads to growing money. Learn the secrets of successful asset allocation.
Albert Einstein once called compound interest the greatest force in the world. And let me just sort of give you a little illustration. We often say that the Indians who sold Manhattan Island to the Dutch for less than $20 really got rooked. But what if you had taken that money and invested it at 6% a year? You could now buy back most of the improved real estate in Manhattan. And that’s the idea.
What compound interest means is that the interest that you earned also earns interest, and the way that money can grow is just staggering. It’s a marvelous force. And the government gives you, through IRAs, through 401(k)s, through Sep IRAs, a way to do it tax-free. And it’s just a horrible shame that many people are not availing themselves of the opportunities that the government gives you to do that. With tax-free compounding, this is an absolute winner’s game.