Chapter One The Rewards of Investing The Magic of Compounding

“The greatest mathematical discovery of all time.” That is how Albert Einstein is said to have described compound interest. This first chapter emphasizes the magic of compounding—the interaction of rate of return and time—in the search for optimum long-term rates of return on your financial assets. I believe virtually every financial goal you may have—building capital, obtaining income to meet your day-to-day financial needs, saving for your child's college education, putting away money for your retirement, or any other wealth-building purpose—can be met through a disciplined approach to the ownership of financial instruments.

This is, first and foremost, a book about mutual funds and the mutual fund industry. To set the stage, I will discuss the fundamentals of the different classes of financial assets and their unique investment characteristics. While this is not a textbook on the financial markets, I believe the intelligent, and ultimately successful, investor must consider and understand the three major categories of liquid financial securities: stocks, bonds, and cash reserves.

I hope this first part helps eliminate some of the mystery of the financial markets. This is no mean task. I have realized over the years that many individual investors regard the financial markets as enigmatic, occult, and driven by forces unseen. Mysterious though the markets may seem in the short run, in the long run it is the basic ...

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