Compound return is achieved when you invest a sum of money at a particular rate of return. Instead of taking out the interest earned after a year, you add it back to the principal sum and reinvest this larger sum.
So the next year, the rate of return is on a larger principal sum. This continues until the returns a year become greater and greater!
For example, say you invested $100 into a stock that gave you an annual return of 20%. At the end of one year, you would have $120. Instead of taking out the $20 profit, you leave it inside for another year at the same 20%.
At the end of the second year, your investment would grow to $144. The next year, it would grow to $172.80 and on the fourth year, it would grow to $207.36!
Albert Einstein, the greatest genius of our time once remarked that compound interest was the greatest mathematical discovery ever made!
He came up with a formula called the Rule of 72. It states that if you take 72 and divide it by the Annual Percentage return, it will give you the number of years your investment would double!
For example, in the previous case, the percentage return was 20%. So if you take 72 / 20 = 3.6 years you will see your investment of $100 double to $200 in 3.6 years.
The power of compounding was Warren Buffett's secret weapon in creating the second biggest fortune in the world, purely by investing in US stocks.
Warren achieved an average annual return of 24.7% for 49 years! This means that is money doubled every 2.9 years (72 / 24.7). He turned an investment of $100,000 in 1956 into $4,200,000,000 ($4.2 billion) today.
You may be thinking that a 12.08% annual return from the stockmarket is small. However, when allowed to compound over a period of time, it will turn small amounts into huge returns!
Again, imagine if you were to earn an average of $3,000 a month for your entire working life of forty years. If you were to just invest 10% of your in-come a month (i.e. $300) into the US stock market and allowed it to compound at 12.08%, how much would it grow to?
Using a financial calculator, you will see that $300 a month invested at 12.08% will grow to $3 million! And that's just from investing $300 a month.
If you could invest $1,000 a month at 12.08% (I am sure you can easily create this additional in-come stream), it will grow to $10.02 million!
The only question is when are you going to start investing and compounding your way to lifetime wealth.
Friday, 10 June 2011
Growing Your Money at Millionaire Returns
All self-made millionaires utilize the power of investing to get their money to make them even more money.
They get their money to start working for them so they can eventually stop working for money.
Unless you master this money skill of investing, you will never achieve financial freedom and abundance.
However when it comes to investing, most people share the painful experience of getting burnt in the stock market or in forex.
'If I had kept all my money in the bank, I wouldn't have lost half it.' 'After so many years of buying and selling, I find that after all the effort I have merely broken even'.
'I should have kept the money in the bank instead.' ' Every time I buy a stock, it seems to go down.'
Do you share this experience with most investors?
If so, you are one of many people who have developed a phobia of investing and have formed the belief that 'investing is risky'. As a result, you are resigned to keeping your money 'safe' in fixed deposits earning a measly 2%-3%.
This belief is compounded by the fact that we are taught by finance courses, banks and financial advisors that 'High risk leads to high return'. In order to earn high returns, you must be a risk taker!
This is totally rubbish! All of us have been brainwashed by this inaccurate generalization. In fact, the greatest investors in the world are NOT risk takers.
They are in fact, very risk averse. Warren Buffett, the world's greatest investor, who achieved 24.7% returns per year for the last 49 years is extremely risk averse.
His fundamental principle in investing is 'capital preservation.' He would rather not make any money if there is a chance of losing it.
His first rule in investing is 'Never Lose Money.' His second rule is 'don't forget rule number one.' As a result, Warren will only invest in a stock if it has very low downside and a very high probability of success of at least 90%.
To be a winning investor, you must adopt this same principle! You must be risk averse! You must always follow the principle of 'capital preservation.'
Now, you may ask me, ' If high risk does not lead to high returns, then what does?' The answer is 'financial intelligence.' High financial intelligence leads to high returns!
When you have high financial intelligence, there is little risk, because you know exactly what you doing. When you don't have strong financial intelligence to fully understand the business behind the stock and forex, then investing becomes very risky.
Risk is contextual. How risky an activity is depends on the level of competence of the person doing that activity.
So is investing risky? Again it depends. If you are like the majority of people who have not been trained and have low financial intelligence, then it is highly risky!
It's like climbing that mountain with no training at all. Indeed, to them it is high risk, high return. I would suggest that they keep their money in the fixed deposit.
However to Warren Buffett, investing is 'low risk, very high return' because he has a high level of competence in investing. So again, you can see that high risk does not lead to high return, it is high level of competence that leads to high return.
They get their money to start working for them so they can eventually stop working for money.
Unless you master this money skill of investing, you will never achieve financial freedom and abundance.
However when it comes to investing, most people share the painful experience of getting burnt in the stock market or in forex.
'If I had kept all my money in the bank, I wouldn't have lost half it.' 'After so many years of buying and selling, I find that after all the effort I have merely broken even'.
'I should have kept the money in the bank instead.' ' Every time I buy a stock, it seems to go down.'
Do you share this experience with most investors?
If so, you are one of many people who have developed a phobia of investing and have formed the belief that 'investing is risky'. As a result, you are resigned to keeping your money 'safe' in fixed deposits earning a measly 2%-3%.
This belief is compounded by the fact that we are taught by finance courses, banks and financial advisors that 'High risk leads to high return'. In order to earn high returns, you must be a risk taker!
This is totally rubbish! All of us have been brainwashed by this inaccurate generalization. In fact, the greatest investors in the world are NOT risk takers.
They are in fact, very risk averse. Warren Buffett, the world's greatest investor, who achieved 24.7% returns per year for the last 49 years is extremely risk averse.
His fundamental principle in investing is 'capital preservation.' He would rather not make any money if there is a chance of losing it.
His first rule in investing is 'Never Lose Money.' His second rule is 'don't forget rule number one.' As a result, Warren will only invest in a stock if it has very low downside and a very high probability of success of at least 90%.
To be a winning investor, you must adopt this same principle! You must be risk averse! You must always follow the principle of 'capital preservation.'
Now, you may ask me, ' If high risk does not lead to high returns, then what does?' The answer is 'financial intelligence.' High financial intelligence leads to high returns!
When you have high financial intelligence, there is little risk, because you know exactly what you doing. When you don't have strong financial intelligence to fully understand the business behind the stock and forex, then investing becomes very risky.
Risk is contextual. How risky an activity is depends on the level of competence of the person doing that activity.
So is investing risky? Again it depends. If you are like the majority of people who have not been trained and have low financial intelligence, then it is highly risky!
It's like climbing that mountain with no training at all. Indeed, to them it is high risk, high return. I would suggest that they keep their money in the fixed deposit.
However to Warren Buffett, investing is 'low risk, very high return' because he has a high level of competence in investing. So again, you can see that high risk does not lead to high return, it is high level of competence that leads to high return.
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