Fun With Compounding OK. Maybe "fun" is a bit of an exaggeration. However, some basic compounding examples can be enlightening, and sometimes even astounding, to both the novice and the more-experienced investor.				> Home > Glossary > Support
		No lesser a mind than Albert Einstein is reputed to have called compound interest "the most powerful force in the universe." Let's see why Uncle Albert was so impressed.
		Compounding refers to "interest on interest." If you invest $1,000 in a certificate of deposit that yields 5% interest a year, you'll receive $50 in the first year. However, if you reinvest that $50, you'll receive a greater dollar return the following year: You'll get another $50 from your original $1,000 investment, plus $2.50 from the $50 you reinvested. Assuming reinvestment of all returns, the total value of your investment after five years would be equal to:
		$1,000 x 1.05 x 1.05 x 1.05 x 1.05 x 1.05 = $1,276
		Notice that you didn't just get a 25% return (5% x 5 years). The power of compounding gave you a 27.6% return instead. We can also express the compounding equation using exponents:
		$1,000 x (1.05)5 = $1,276
		Now that we've laid out the math, let's use it to observe the effects of compounding on some investment scenarios. Please note that we're making some broad assumptions about the future returns, based on historical performance. We're also not taking into consideration such important investment concepts as volatility and risk, so don't make any investment or asset-allocation decisions based solely on these examples.

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