With stocks and
mutual funds, long-term gains are often large due to compounded
interest versus simple interest. With simple interest you
only get interest on original principal. With investments
such as stocks and mutual funds, you get interest on principal
and then interest on principle + interest, and so on. Let's
demonstrate with one dollar. Suppose you save one dollar
a day for several years at the following interest rates,
and number of years invested. How much would you end up with
continuously getting interest on interest on interest? Now
remember, you are taking a dollar out of your pocket everyday
and investing it.
This example assumes there are 28 days in every month, and
this amount is deposited each month with compounded interest.
Try MsFinancialSavvy.com's Monthly Deposit Savings Calculator
to figure out more likely scenarios.
