ASX shares have done well at growing investor's wealth over the long term. Given enough time, compounding can help us deliver very pleasing returns during the course of time.
One of the world's greatest scientific minds, Albert Einstein, once said the following about compounding:
Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn't, pays it.
How quickly can we double our money?
Interest rates have gone up a lot over the last couple of years, and we can now get a much better return from cash. If a bank account can give a return of 5% per annum, then it would take 14 years to double one's money, ignoring the effect of tax.
Over the ultra-long term, the ASX share market has delivered an average return per annum of around 10%. It'd be understandable why someone may think it'd take 10 years for ASX shares to double someone's money – wouldn't 10% a year mean it takes 10 years?
If someone had invested $1,000, then in year one a 10% return would be $100 as you'd expect.
In year two, we're starting with $1,100 – a 10% ASX share market return would generate a return of $110, with the portfolio ending with $1,210.
In year three, we're starting with $1,210 – a 10% ASX share market return would generate a return of $121, ending the portfolio with $1,331.
It takes less than eight years for a $1,000 investment to double into $2,000 if it were growing at 10% per annum. Of course, there's no guarantee that the ASX share market will make returns of that level in the future.
What about stronger levels of returns?
Historically, there have been some investments that have delivered stronger returns than 10% per annum. There are plenty of articles on The Motley Fool website outlining (ASX) shares that may be capable of producing outperformance over the long term from here.
If an investment is able to produce returns of around 11%, it would double $1,000 into $2,000 in less than seven years.
An investment that's making returns of 15% per annum would turn $1,000 into $2,000 in five years.
Since 1965, Warren Buffett's Berkshire Hathaway has returned an average of around 20% per annum, though the rate of return has reduced as it has gotten bigger in the last couple of decades. Making a return of 20% per annum turns $1,000 into $2,000 in just over four years.
Trying to pursue extremely high levels of return could be counterproductive, but if our portfolios can just deliver average returns per annum of 10%, we could do very well.
