The secret to great returns in investing

23 April 2026

In the world of finance, investors often fixate on the "next big thing" or correctly timing the volatility in the market. However, the most powerful tool in an investor’s arsenal is not a complex algorithm or a specific stock pick, it is something far simpler. Albert Einstein famously called it the "eighth wonder of the world," noting that "he who understands it, earns it and he who doesn't, pays it."

It is compounding.

Compounding is the process where the value of an investment accelerates as the returns generated — such as dividends, fund distributions, or capital gains — are systematically reinvested rather than withdrawn. This creates a "snowball effect," where you begin to generate a return not just on your initial capital, but on the accumulated growth of previous years. Unlike a simple return, which only pays out on your original principal, compounding ensures that every pound of profit is put back to work, exponentially increasing your wealth-building potential over time.

Here is how compounding works within a diversified investment portfolio. Imagine Sarah invests £100,000 into a global equity fund with an expected average annual total return of 7% (comprising both share price growth and dividend yield).

Year 1: Sarah’s portfolio generates a 7% total return, adding £7,000 to her value. By the end of the year, her holdings are worth £107,000.

Year 2: Assuming the market return remains a steady 7%, Sarah doesn't just earn on her original stake. Because she reinvested her dividends and maintained her position, the 7% growth is now applied to her new balance of £107,000. Her portfolio ends Year 2 at £114,490.

Year 10: If Sarah continues to reinvest all distributions, the "snowball" gains momentum. In Year 10 alone, her portfolio would grow by roughly £12,800, bringing her total balance to approximately £196,715.

Year 30: Without Sarah adding a single extra penny, the power of compounding the total return turns her original £100,000 into over £761,000.

To calculate the value of the investment through compounding, we use the formula: £A = P(1 + r/n)^nt

              A is the final amount.

P is the initial amount.

r is the annual interest.

n is the number of times interest applied per time period.

t is the number of years.

For compounding to work effectively there are three characters in play: time, rate of return and reinvestment.

Time is the key variable, the longer your money is invested the steeper the 'bend' is on the hockey stick graph. This bend is known as the inflection point, and the point at which the 'snowballing' effect begins.

Rate of return is an uncontrollable variable, however, as long as there is a consistent, positive return the investment will grow.

The Rule of 72 is a simplified formula that calculates how many years it’ll take for an investment to double in value, based on its rate of return, so long as that falls between 6% and 10%.

For example, if your portfolio returns 6.5% a year, your money will double roughly every 11 years since 72 / 6.5 = 11.

Compounding is a "get-rich-surely" strategy and is a long-term investment strategy. It rewards the patient and the disciplined investor.

The Chinese proverb reminds us that "the best time to plant a tree was 30 years ago, the second-best time is now". Start investing and letting your portfolio compound and you will see the growth.

Important information
 

This article is intended to be Walker Crips Investment Management's own commentary on markets. It is not investment research and should not be construed as an offer or solicitation to buy, sell or trade in any of the investments, sectors or asset classes mentioned. The value of any investment and the income arising from it is not guaranteed and can fall as well as rise, so that you may not get back the amount you originally invested. Past performance is not a reliable indicator of future results. Movements in exchange rates can have an adverse effect on the value, price or income of any non-sterling denominated investment. Nothing in this document constitutes advice to undertake a transaction, and if you require professional advice you should contact your financial adviser or your usual contact at Walker Crips. Walker Crips Investment Management Limited is authorised and regulated by the Financial Conduct Authority (FRN:226344) and is a member of the London Stock Exchange. Registered office: 128 Queen Victoria Street, London, EC4V 4BJ. Registered in England and Wales number 4774117.