2025-0127M-0123 Austin, TX
Today, let’s explore the power of compounding—the phenomenon that Albert Einstein reportedly called the eighth wonder of the world—through a simple mathematical lens: three to the third power (3³). This humble equation holds an enlightening lesson for investors seeking long-term growth.
The Power of 3³ and Synchronicity
3³ equals 27. While it’s a basic calculation, it symbolizes a profound concept: small increments of growth can generate exponential results over time. In investment terms, compounding works similarly by reinvesting returns to grow not just your initial principal but also the returns on those returns.
I’d like to introduce the Rule of 123. Four days ago I blogged about the synchronicity that 123 has for me, and now with this blog post it is even more synchronistic to me.
Compounding in Action: The Rule of 123
To further appreciate compounding’s power, consider the Rule of 123: a simple way to estimate how long it takes for an investment (or debt) to triple. Divide 123 by your annual rate of return. For example:
• At a 12.3% return, your money triples in approximately 10 years (123 ÷ 12.3 = 10).
• At a 24.6% return, it triples in about 5 years (123 ÷ 24.6 = 5).
Now, imagine you owe $1,000 on a credit card with a 24.6% interest rate. If unpaid, the balance triples in 5 years due to compounding. After another 5 years, it triples again, and by 15 years, it has tripled three times, growing to an overwhelming $27,000.
Paying off this original $1,000 debt is equivalent to earning a guaranteed 24.6% annual return on an investment—a return that’s nearly impossible to find in the stock market. This underscores the importance of eliminating high-interest debt as a financial priority.
Three Strategies to Maximize Compounding
- Start Early Time is the most critical variable. Even small contributions made in your 20s can surpass larger investments made later in life. For example, investing $200 monthly starting at age 25, with an average 8% return, grows to nearly $700,000 by age 65. Starting at 35, the same $200 monthly only reaches about $300,000.
- Stay Consistent Volatility is inevitable, but regular contributions during market dips can significantly enhance long-term returns. Dollar-cost averaging—investing a fixed amount at regular intervals—helps reduce the impact of market timing.
- Reinvest Dividends Dividends may seem small initially, but when reinvested, they turbocharge compounding. Over decades, they can account for a significant portion of total returns, especially in high-dividend-paying stocks.
The Caveat: Compounding Cuts Both Ways
Compounding isn’t exclusive to growth; it also magnifies debt and fees. Credit card interest, for instance, compounds in the lender’s favor, turning small balances into unmanageable debts. Similarly, excessive fees on investment accounts can erode long-term gains. A 2% annual fee may sound trivial, but over 30 years, it can slash your returns by up to 40%.
Conclusion: Think in Exponents, Not Additions
Investment compounding is about shifting your mindset from linear growth to exponential growth. It rewards discipline, patience, and long-term thinking. By optimizing the three factors—principal, rate of return, and time—you can harness the magic of 3³ and turn modest investments into life-changing wealth.
So, as you review your financial goals this year, remember the lesson of 3³: small, consistent actions grow into extraordinary outcomes over time. Embrace compounding, and let time work its wonders.
Happy investing!
Update 2025-0127M-1545 Radio East
The stock market just closed and just as it was five years ago, it was a large down day in the market. Five years ago, I posted:
Unlike five years ago, today’s market drop was more technology company centric – especially influenced by an oversized drop in Nvidia. The S&P 500 dropped one and a half percent to around 6000, DOW actually gained two-thirds of a percent to around 44,700, and Nasdaq dropped a little over three percent to around 19,320. My own portfolio was up big with $APPL and $EB, and down big with $AMD.
surfing the universe 
