The power of compounding - J.P. Morgan Asset Management

The power of compounding

Contributor William Meadon

Albert Einstein is widely credited with calling compounding “the most powerful force in the universe”. Whether the iconic genius ever uttered these words is debatable but there’s no doubting the point being made: compounding can have a huge impact.

So, what is it and how does it work?

In terms of investing, compounding refers to the process by which the earnings from assets are reinvested to generate additional future gains. Because further growth is generated from those earnings as well as the value of the original assets, an investment’s value can swell exponentially over time. While water and sun will grow a tree, fertiliser can take it to even greater heights – the same principle applies with compounding, with reinvesting acting as the fertiliser.

The impact of time

Because the effects of compounding are exponential they become stronger over time, so the second key factor after reinvesting your earnings is staying invested. The impact of a few additional years can be significant: for example, if you started saving aged 25 and invested £5000 a year in an investment that grew at an annual rate of 5%, you would have nearly £300,000 more 30 years later at the age of 65 than if you started at 35.

As a result, a long-term outlook is vital to benefit properly from compounding, a strategy which I like to call the “get rich slow” approach.

Harnessing the power of compounding with investment trusts

The unique structure of an investment trust makes it ideally suited to this strategy: investment Trusts are closed-ended structures which have the advantage of being able to place some revenue in reserve during bumper years, and subsequently draw on this during more turbulent periods for the markets. Using these reserves, trusts are able to smooth the effects of volatility and provide consistent dividend payments over time – by reinvesting these dividend payments back into the trust, investors can ensure the effects of compounding are maximised.

To demonstrate the success of this approach, if you had put £20,000 in an ISA 15 years ago and invested only the capital in the JPMorgan Claverhouse Investment Trust, you could have put one child through university and helped them with a £12,000 first home deposit by now. This sounds impressive, until you realise that had you reinvested your earnings from the Trust, you could have put two children through university and helped them with a £15,000 first home deposit. However, investors must bear in mind that with every investment comes an element of risk, and that there are no guarantees on their capital returns.

Staying in the game

The third factor to be aware of is the potentially huge negative impact even a few days out of the market can have on the effects of compounding over time. The perils of market timing are well illustrated by the fact that those who committed £10,000 to the FTSE All Share in 1999 and remained fully invested until 2018 achieved an annualised total return of 5.1%; in contrast, someone who missed the best 30 market days within this period would have suffered a -5.1% loss. So, you can see that it really does pay to stay invested.

The bottom line is that the longer you have to invest and the more committed your approach, the more effective compounding can be for you. By making a long-term investment through a trust like JPMorgan Claverhouse Investment Trust plc, you can essentially do nothing, reinvest the income and let compounding do the rest. With diversified investments in large, income-generating British companies listed on the FTSE, JPMorgan Claverhouse Investment Trust plc has successfully provided its stakeholders with consistent and growing dividends for 46 consecutive years.

In addition to the JPMorgan Claverhouse Investment Trust plc, J.P. Morgan Asset Management offers over 20 other investment trusts for you to choose from. These include a range of strategies, which can deliver regular income or capital growth, or even a combination of both. To find out more follow the links below.

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JPMorgan Claverhouse Investment Trust plc

Investment objective

The Company aims to provide a combination of capital and income growth from a portfolio consisting mostly of companies listed on the London Stock Exchange. The Company’s portfolio consists typically between 60 and 80 individual equities in which the Manager has high conviction. The Company has the ability to use borrowing to gear the portfolio within the range of 5% net cash to 20% geared in normal market conditions.

Risk profile
  • Where permitted, a Company may invest in other investment funds that utilise gearing (borrowing) which will exaggerate market movements both up and down.
  • This Company may use derivatives for investment purposes or for efficient portfolio management.
  • External factors may cause an entire asset class to decline in value. Prices and values of all shares or all bonds could decline at the same time, or fluctuate in response to the performance of individual companies and general market conditions.
  • This Company may utilise gearing (borrowing) which will exaggerate market movements both up and down.
  • This Company may also invest in smaller companies which may increase its risk profile.
  • The share price may trade at a discount to the Net Asset Value of the Company.
  • The single market in which the Company primarily invests, in this case the UK, may be subject to particular political and economic risks and, as a result, the Company may be more volatile than more broadly diversified companies.
  • Where permitted, a Company may invest in other investment funds that utilise gearing (borrowing) which will exaggerate market movements both up and down.
JPMorgan Claverhouse Investment Trust plc

Important information

This is a marketing communication and as such the views contained herein do not form part of an offer, nor are they to be taken as advice or a recommendation, to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Changes in exchange rates may have an adverse effect on the value, price or income of the products or underlying overseas investments. Past performance and yield are not reliable indicators of current and future results. There is no guarantee that any forecast made will come to pass. Furthermore, whilst it is the intention to achieve the investment objective of the investment products, there can be no assurance that those objectives will be met. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy Investment is subject to documentation. The Investor Disclosure Document, Key Features and Terms and Conditions and Key Information Document can be obtained free of charge from JPMorgan Funds Limited or This communication is issued by JPMorgan Asset Management (UK) Limited, which is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England No: 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.