Compounding Interest Investment Formula for Trend Followers

“Nothing is unknown, just temporarily not understood.”
Captain James T. Kirk

There is only one way to profit in the market. You must apply a systematic approach over time, compounding interest from your investment as you go. Don’t be so naive to expect you will get rich overnight. Remind yourself that patience is a virtue when it comes to trend following. You must have the discipline to work within the structure of your system. For example, if you can manage to make 50% a year in your trading, you can grow an initial $20,000 account to over $616,000 in just seven years. Trust that time and the power of compounding will take over if you stick with your system. You think 50% is too unrealistic for you? Do the math again using 25% as the compound interest formula. In other words, compounding is essential.

Hypothetical investment of $20,000 (annual rates of return compounded)

30% 40% 50%
Year 1
$26,897 $29,642 $32,641
Year 2
$36,174 $43,933 $53,274
Year 3
$48,650 $65,115 $86,949
Year 4
$65,429 $96,509 $141,909
Year 5
$87,995 $143,039 $231,609
Year 6
$118,344 $212,002 $378,008
Year 7
$159,160 $314,214 $616,944

An Extract from the Trend Commandments Regarding Compounding

The big money of letting profits run: Trend following at its best aims to compound absolute returns. It doesn’t shoot for average.

The goal is to make the knock your socks off returns, not passbook savings interest. Trend following also has the unique ability to lie and wait for targets of opportunity. That means making a killing on unpredictable surprises.

compound interest calculator
Systematically compounding your investment returns is the best way to build up your assets over time. Photograph by 401(K) 2012, CC.

You may also like to read my thoughts on the Volatility and Risks of Investing and on Investing Expectations.

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