Effect of compounding

I was chatting with one of my colleague about investing and he brought up his investment on crypto-currencies. He was never interested in investing before so i was curious why the sudden interest in investing. He says that the return for crypto huge. Easily 20%.

I guess people are always looking for higher returns before they start investing.

A returns of 7% on $1000 is only 70 dollars while a returns of 20% on $1000 is 200 dollars. Surely getting 200 dollars is a more attractive incentive to start investing. Well if you gamble your money in Casino, the returns is 50% per bet. That's $1000!! Instant gratification! It's no wonder so many people are hooked on gambling.

Let's not forget about the risk on the above returns. You are not going to win every time in the casino. In fact, you are going to loss most of the time and the 50% return will not mean anything. Also, how consistent are you able to get 20% return from the Crypto market? The volatility of the crypto market is not something anyone can navigate through successfully. If you are able to consistently achieve 20% return, kudos to you. That's one golden ticket to Financial Independence.

7% is the long term average return of the STI. This mean that if you invest in the STI index and hold it long term (20 years or so), you are going to get a annual return of 7% (including dividend). This is very achievable for average investor.

So what does a consistent annual returns of 7% gets you? If you just start with $1000 and reinvest the returns yearly, you get about $5500 at the end of 25 years. This is not too far off from a simple return of 20% for 25 years. (See graphs below). Compounding starts slow..... Because of that its really not that obvious or interesting to anyone. However, with time, it rapidly catches up.

Hence I believe its important to start investing early regardless how low or unattractive the returns may seems and let compounding work its magic with the help of time.