Compounding is a mathematical term and it is seriously significant when it comes to understanding how investment works. With compounding, very small investments can turn into very large investments given enough time. Time becomes a factor that carries almost as much importance as the rate and the dollars invested. An additional factor to consider is the frequency of compounding. A term deposit that pays interest monthly will deliver a greater future value than one that only pays annually.

Below, is an example of two investments with all factors being equal apart from the frequency of compounding.

Rate 6% per compounding period, 20 periods (1 period = 1 year), $1000 initial investment = Future value of $3207

Now if we compound the same amount at the same rate but with the compounding occurring more frequently

Rate 0.5% per compounding period, 240 periods (1 period = 1 month), $1000 initial investment = Future value of $3310

As demonstrated, the $1000 investment that compounds its' returns monthly has a higher future value than one that compounds annually.

So for your investments, pay attention to time, frequency, rate of return and $'s invested.

Our ancestors were lifted out of an impoverished subsistence existence by the advent of the agricultural revolution that was closely related to the industrial revolution.

Farming practices did not improve much between the 8^th & 18^th centuries. George Washington had access to ploughs that were no better than those used during the time of Julius Caesar.

Animal breeding and large scale agriculture that resulted from technologies like the seed drill, plow & mouldboard, harvesters and haying machines allowed for specialisation of skills outside of simply tending to the land. Read more about the agricultural revolution here

With free time and the development of a scientific mind set defined by the testable hypothesis, men were free to explore and experiment. In 1563, Rev. William Lee invented the stocking frame and by 1908 Henry Ford was mass producing the Model T Ford. Read more about the industrial revolution here

Both the agricultural & industrial revolutions relied heavily on energy extracted from burning carbon based fuels. Essentially, our lifestyles today owe much to scientific ingenuity and carbon.

Even as these two waves of wealth roll on and evolve a new and vastly more powerful wave of wealth is swelling up & that is the knowledge wave driven by information technology.

The knowledge wave brings with it, very different forms of wealth and as with the wealth delivered by both the industrial revolution & agricultural revolution, there will be winners & losers.

The knowledge revolution will reward the most creative and talented individuals and will decimate centrally controlled systems including energy, health and education leaving a more redundant and powerful society.

Exponential increases in processing speed and bandwidth will continue to put downward pricing pressure on everything touched by the power of bits.

Be prepared to for an exciting future characterised by new & different forms of wealth.

According to the Economist, information growth never missed a beat even as most investments got roasted by the Global Financial Crisis. One would have expected some sort of relationship between wealth and information creation. After all, as economies grow in size and complexity the information created in the process would be expected to grow too. So how did information creation accelerate even as standard wealth measures such as stock indices would have appeared to indicate that information creation should have fallen?

Possibly, wealth as measured by stock markets and other wealth indicies is missing something. Perhaps the market dislocation was actually a phase transition indicating a shift from a tangible economy as seen in the building of houses and consumption of fossil fuels into an intangible economy based increasingly on the virtual and including 'mind spaces' such as those seen in online massively online multiplayer games.

Read the Economist article on Information Growth

Useful definition of Earnings before interest, taxes, depreciation and amortization

Click here to visit value cruncher

Prior to making an investment, it is worth considering the risks that are involved relative to the expected reward or investment yield. Bear in mind that lending money is quite different to making an investment. Placing your hard earned cash in the bank is really termed making a loan not making an investment. Investors have unlimited downside and potentially unlimited upside while lenders are usually guaranteed a certain fixed return and their loan might be secured against an asset or guaranteed via the banking system. Click here for an educational video that explains the difference between debt & equity.

Investment properties provide a good example of the relationship between yield and risk because historically 'bricks and mortar' have been viewed as low risk investments; after all it is hard to completely destroy land and buildings and in populated areas like towns and cities there will always be a demand for accommodation. In the case of property, investment yield comes in the form of rent and capital growth plus in Australia at least, negative gearing tax savings can add to the effective yield. As a simple example, a house with net rent i.e. rent after costs such as rates & management fees of $10,000 per annum and that cost $400,000 is providing a net rental yield of 2.5%. Assuming capital growth is 2.5%, and then the total yield is 5%. For the example given, if there were no tax benefit available, 5% may not be enough given that putting the equivalent money into a bank deposit would yield the same amount with little to no risk associated.

When it comes to investing, it pays to carefully weigh up the risks and consider what return is necessary. Be careful to use the right numbers in the investment equation and get professional help if you are at all unsure. Poor investments are very expensive.

The Crash Course seeks to provide you with a baseline understanding of the economy so that you can better appreciate the risks that we all face.

In my opinion, this is a 'must watch' for every person who wants to protect their wealth in the future. Crash Course by Chris Martenson