“The first rule of compounding: never interrupt it unnecessarily.”
- Charlie Munger
In my new book, The Other Birds & Bees: Money $ecrets No One Ever Taught You, we discuss at length the power of compounding and how if you start investing early and have time in the market (vs. trying to time the market), you can experience material growth in account balances. The key, however, is to let that power of compounding do its thing and not stop the momentum just as it is getting going (you have probably seen charts showing a relatively flat growth curve in the early years which steepens dramatically over time).
Let’s say you had been investing for 5 years prior to April 2025 with funds you don’t need for 10 years or more. Then came the tariff tantrum and you got shaken out of the market. Rather than continuing the power of compounding with dividends being reinvested at even lower prices as the stock market temporarily declined, instead you curtailed the compounding process and, in many cases (when people sell low and subsequently buy high), really set yourself back vis-a-vis your long-term goals. (Note: it is very rare that people sell low and buy back even lower – they usually either buy back higher, or don’t buy back at all).
To make the point stick, imagine if the power of compounding applied to other areas of life? Here is an example.
I am training for an athletic competition called HYROX. One of the events is the ‘wall balls’ where you throw a 15 lb ball 10 feet in the air at a target - 100 times. Of course, in the linear, non-compounding world, I have to actually toss the ball up 100 times to reach 100.
But what if the power of compounding applied to this endeavor as well? Suppose after doing 10 wall balls, those 10 started doing their own wall balls at a 10% rate - giving me 1 extra throw "for free". As I keep going (AKA invest more money), those wall balls in turn do their own wall balls and by the time I get to 100, a material portion of the wall balls were completed not by me, but by compounding.
It sounds farfetched, but this is exactly what happens with compounding when it comes to money.
Case in point, if you invest $100K when a child is born and don’t touch it until she is 18, with just average stock market returns, she’ll have around $400K, with $300K, or 75% of the balance, coming not from anything you did, but from the power of compound returns on the original $100K. It is like having your own team of workers doing things for you.
The next time you are thinking of selling stocks for money you don’t need for many years – especially if the only thing that has changed is that prices are temporarily down – ask yourself: do I really want to fire my compound workers who are just getting started and who are going to multiply over time while I sleep?