When the subject of compound interest comes up, many people bring up billionaire investor Warren Buffett and his partner Charlie Munger. If you are looking for even more famous names who believed in the power of compounding, how about Benjamin Franklin and Albert Einstein? These two scientists understood compound interest beyond mathematical formulas; they also grasped the socioeconomic concepts that make this investment strategy effective.
How is Compounding Gains Achieved?
Both Einstein and Franklin realized that compounding gains were made possible by all the individuals who contribute to the economy despite not being investors. Think about banks that offer certificates of deposit and other investment products; their ability to offer competitive rates hinges upon the strength of their balance sheets, which in turn depends on deposits made by account holders, of whom only a certain percentage are investors.
To a certain extent, the COVID-19 pandemic presents some aspects that make it similar to the way compound interest flows over time. We know that a single patient infected with SARS-CoV-2 can infect more than one individual, thus creating an exponential effect. The widespread contagion of the novel coronavirus has unfolded like a very successful compounding investment.
Investments During the Coronavirus Pandemic
Investors who have been able to hold onto their compound interest accounts during the pandemic have likely fared better than investors who have actively taken market positions on Wall Street. We are not going to deny that the market has rebounded very strongly since the Black Monday and Black Thursday crashes of March 2020, but economists and market analysts are still scratching their heads as they try to explain how this recovery took place without merit, particularly at a time when economic activity has been sharply reduced by pandemic restrictions.
It is safe to assume that many compound interest investors have been forced to either cut back on monthly contributions or stopped making them altogether during the pandemic; what this means for many of them is that they only benefited from earning gains through interest, which is certainly better than nothing. Still, these investors were spared from the tragedies suffered by many novice traders who decided this was a good time to try their luck on mobile trading platforms such as Robinhood.
These investors were spared the tragedies suffered by many novice traders who decided this was a good time to try their luck on mobile trading platforms such as Robinhood
One thing that compound interest fans should keep in mind is that their investments are not completely passive. Even Warren Buffett made changes to the Berkshire Hathaway portfolio by cashing out of some financial services stocks and investing in gold mining companies instead. Should you spot better CD rates or low-risk investments that you can apply compounding strategies during the pandemic, you should take time to evaluate them.