The Miracle of Compound Interest

If you had invested $1 in the year 1500 at 5% compound interest, it would be worth $47,000,000,000 today. Nearly 50 billion dollars. You would edge out Bill Gates and Warren Buffett to have the world's largest fortune.

Lots of people must have had the equivalent of $1 in 1500 (there weren't US dollars, of course, but the math is the same for pounds or ducats.) Where are all the old fortunes? You'd think at least one fortune would survive unsquandered. But you have to look pretty far down the list of richest people to find a fortune not made this century. A Rockefeller is number 67 on the Forbes 400 list, but most of the fortunes were made in the last 100 years. Some possible theories are:

  • Over the very long term, interest rates are much less than 5%
  • While interest rates are usually 5%, occasional disasters occur which causes the loss of the entire fortune.
  • Fortunes never pass through many generations without being divided or squandered.

Copyright 2007, Trevor Blackwell. Home