Power of Compounding

Take advantage of the power of compounding — Start investing more, now

Planning for one's financial goals can be a complex affair. However, one of the most important concepts to be aware of is the effects of compounding on your investments as you are saving for your future. The importance of the concept is explained below.

What are compound returns? Compound returns are returns calculated on the initial principal and also on the previously accumulated returns. With compounding, exponential growth occurs when you derive returns from both your initial investment and returns achieved before.

Making the magic of compounding work for you lies with two key factors: 1) how long you have to invest, and 2) the rate at which your investment grows. The table below shows how exponential growth is achieved when a consistent growth factor or rate or return is applied on an investment's current value over time. Consider the case where an investment grows at 4% per annum. In the first year of growth, a $100,000 investment earns an annual return of $4,000 ($104,000-$100,000). At the 30th year, compounding results in the annual return increasing by more than three times to $12,475 ($324,340 - $311,865).

Year Total Investment
Annual Rate of Return (%)
0 100,000 100,000 100,000 100,000
1 100,000 102,000 104,000 106,000
2 100,000 104,040 108,160 112,360
3 100,000 106,121 112,486 119,102
4 100,000 108,243 116,986 126,248
5 100,000 110,408 121,665 133,823
6 100,000 112,616 126,532 141,852
7 100,000 114,869 131,593 150,363
8 100,000 117,166 136,857 159,385
9 100,000 119,509 142,331 168,948
10 100,000 121,899 148,024 179,085
15 100,000 134,587 180,094 239,656
20 100,000 148,595 219,112 320,714
25 100,000 164,061 266,584 429,187
30 100,000 181,136 324,340 574,349

The second factor impacting investment outcomes is the rate of return. To illustrate, let us consider a $100,000 investment to be invested today. Over a period of 30 years, if the investment grows at a rate of 2% per annum, the investment will grow to $181,136. If the rate of return is improved to 6%, $100,000 can grow to $574,349, more than three times the amount compared to the amount if it had 2% growth per annum. Given the large differences in outcomes, we conclude that achieving a higher rate of return for the long term is therefore of paramount importance to reaching your financial goals.

How does compounding affect us when we are saving towards a long term goal, for say, our retirement? Saving for a long term goal is slightly different from the above scenarios as a third factor comes into play, i.e. the amount of contributions one makes to the financial goal as time passes. Time, however, continues to play a critical role in determining the amount of funds required to save towards a specific goal.

The table below shows the amount of savings required each year, when compounded at a rate of 6%, to save a million dollars at age 65. Clearly, a much lower amount of savings is required if one starts saving early. For a young person with a longer time horizon, the amount of savings required annually and the total cash outlay to reach his/her million dollar goal is significantly lower at about $6,000 p.a. than if he decided to start saving when he is closer to retirement. If he started investing at either ages 35, 45 or 55, as the amount required per annum will approximately double, quadruple or increase by eleven-fold respectively. The total investment amount for the 25-year is also significantly lower, at about a third of the amount required if he starts saving at 55.

Starting Age Savings Required Annually Number of Years of Saving Total Investment Amount
25 $6,000 41 $246,000
35 $12,000 31 $372,000
45 $25,000 21 $525,000
55 $67,000 11 $737,000

In conclusion, how much you will be able to save towards your goals will be affected by the following three key factors:

  1. How long you have to save;
  2. How much you contribute to goal every year;
  3. The rate of investment return achieved.

For young people, the best way to grow your nest egg is to start investing now. For the rest of us, it is better late than never.

Retirement Planning

Are you taking the right amount of risk for your retirement?

Once you have retired, the journey for drawing down your retirement funds will have just begun. The change can be daunting as one becomes a net spender from a net saver. Many people make the mistake of taking a very low level of investment risk at this point. Yet, that in itself could result in serious erosion of the real value of your retirement fund due to inflation.

With UTRADE Robo, we aim to smoothen out the transition as our technology dynamically adjusts the risk level of your portfolio as you progress towards and through retirement. On top of taking into consideration how long you have before you reach your goal, we also take into consideration your expected contribution rate towards and withdrawal rates from your goal.

Goal Time Horizon Risk Level (out of 100)
Retirement 30 100
Education 18 50
Savings Goal - Property 6 18

Our Global Portfolios


Our portfolios invest across asset classes — in stocks, bonds and commodities — an appropriate mix of which is personalised for you. Investing across asset classes allow us to create a range of portfolios with varying risk levels to suit differing objectives and risk profiles. In addition, the wider choice of assets enhances the opportunities to reap the benefits of diversification, reducing anticipated volatility.

Globally diversified

Our portfolios offer diversification to the largest equity and fixed income markets in the world. Our selected equity funds include representations from the 20 largest stock markets by capitalization and almost 5,000 holdings. Our selected fixed income funds include representations across multiple currencies, credit rating grades and durations and hold over 6,000 securities. As market returns deviate across geographies, global diversification allows us to further manage risk and reduce portfolio volatility. When there are unexpected adverse events impacting particular geographical regions, losses from that asset classes affected are limited

How does diversification allow us to manage volatility?

To illustrate how diversification lets us reduce volatility, let us consider a portfolio that is equal weighted in two asset classes, emerging market equities, and gold.

Both assets class had similar returns of about 9% per annum from 2005 to 2017, but each had their own cycles of ups and downs. Mixing both asset classes in a 50-50% portfolio would have allowed us to maintain returns, while the volatility, or average rate of movement up and down, of the portfolio decreases.

Limited Single Security Exposure

The final benefit of diversification is minimizing single security risk. Losses on any particular security are limited by the exposure to that underlying security. For UTRADE Robo, exposure to any underlying equity security contained within a fund used for portfolio construction should not exceed 4% of the overall portfolio. That implies that the impact on the portfolio is limited to 4% if that particular security suffers from a 100% capital loss.

Part of your portfolio will be allocated to equities, allow you to gain exposure to leading global companies.

S&P 500MSCI Merging MarketsFTSE Developed EuropeTopix

While the largest exposure to a single equity security can be up to 4% for a high risk portfolio, the majority of the portfolio will consist of securities with much lower allocations. Across the portfolio, you will diversified across to close to 7,000 securities.

Asset Class Number of Holdings
US Equities 499
Europe Equities 564
Emerging Market Equities 1,957
Japan Equities 2,058
Canada Equities 252
Australia Equities 301
Total 5,631
Asset Class Number of Holdings
US Investment Grade Bonds 2,797
US$ Global Corporate Bonds 1,680
US$ High Yield Corporate Bonds 992
€ High Yield Corporate Bonds 446
Emerging Markets US$ Bonds 403
Emerging Markets Local Currency 213
Total 6,531
Source: Respective Fund Managers, Info as of 31 Jan 2018