Compounding -The secret to Wealth Creation

I will like to share with you guys about Compounding which is vital in growing our wealth in this difficult yet opportunistic period.

Before we proceed further , it is strongly advisable to have spare cash for any contingency that might arise during the stages of our life as it will ultimately affect our decision in our investment and our investment horizon should be at least 5 years or more to witness the effects of Compounding.

The formula for calculation as follow :
R = P (1 + IR) ^ T
R=Return
P=Principal
IR=Interest  rate
T= Time

For example , we have $12,000 for investment and will like to invest in equity (SPH). At current price $3.90 ,its dividend yield is 6. 15%.
1 shares of SPH  is at $3.90.
1 lot = 1 000 shares
1000 shares x 3.90 = $3900 + (GST/brokerage fee/other fee)

For 1 year return:
$12,000 ( 1 + 0.0615)^ 1 = $12,738.
Approximately  return of $738 for 1 year.

For 5 years return, and assuming we reinvest the dividends:
$12,000(1+0.0615)^5=$16,173
Approximately  return of $4173 for 5 year.

For 10 years return,and assuming we reinvest the dividends:
$12,000(1 + 0.0615)^10=$21,796
Approximately  return of $9796 for 10 year.

For 20 years return , and assuming we reinvest the dividends:
$12,000 (1+0.0615)^20=$39,590.
Approximately  return of $27,590 for 20 year.

Above is an example , the dividend yield will fluctuate if the Company is earning less profit and cut back on it's dividend payout.For defensive stock like SPH and telecom stocks such as SingTel/Starhub/M1 ,their earning are quite predictable and thus conservative investors will just buy and hold it for dividends.Price of the shares do fluctuate during bearish period(bad times) and bullish period (good times)that is why we should have a longer horizon to ride out the the volatility .But shares of defensive stocks tend to remain in a certain price region due to it's nature and any dip in price provide a opportunity to accumulate.

We can conclude from the above by reinvesting and starting to invest in our early age will have a significant impact on our return.Imagine if we left the $12,000 in saving account with less than 1% interest rate ,the money will grow at a slower rate provided no inflation (impossible scenario).With inflation , our wealth will slowly eroded as our purchasing power drop as time pass by.That is why our government set up Temasek and GIC to preserve and to grow our wealth.