Compounding Year after year, any money you invest may earn interest, dividends or capital gains. When you reinvest those earnings, they help generate additional earnings; those additional earnings help generate more earnings, and so on. This is called compounding. For example, if an investment returns 8% a year and its earnings are reinvested annually:
- After one year, your total return will be 8%.
- After five years, your cumulative total return will be 47%.
- After ten years, your cumulative total return will be 116%.
Some have called this the 8th wonder of the world.