If a client were asked to estimate how much a £100 investment on a child’s behalf into the stock market via a Junior ISA would be worth on their 18th birthday, if the stock market generates an average return of 8%, how many would be able to correctly guess the answer?
The majority of people underestimate the power of compounding interest*, according to research by Orbis Investments.
More than three quarters (76.4%) of people thought the total value would be much lower than £400, with just 6.6% able to estimate within the correct range.
Dan Brocklebank, director UK at Orbis Investments, said the tendency to underestimate the power of compounding can lead to poor outcomes when it comes to long-term financial decisions.
Brocklebank said: “Our survey confirmed that people still overwhelmingly underestimate how powerful the compounding effect of growth can be over long periods of time. Yet, the vast majority of us can afford to take a truly multi-year perspective with our savings.
“Compound growth may not be intuitive to most but as long as people underestimate the power of compounding they are likely to miss out on the long term benefits of investing in markets. Investing in global equities has been shown to outperform cash over the long term and the magic of compounding plays a part in this.”
Brocklebank said the results of the research showed women were better at estimating the power of compounding, with 27% in the right range or above, compared to 19% of men. Yet, despite their better awareness, women continue to be less likely to invest than men due to a combination of greater risk aversion and lack of spare cash.
* The majority of people underestimate the power of compounding interest
