Magic of Investing = Compounding

The Magic Money Machine

Compounding to grow your wealth

Time horizon and Compounding ("Give me back my Youth!"

The Most Powerful Force in the Universe

The Rich Get Richer!

Asians value education.  However, education alone does not create wealth.  It is what one does with all the knowledge that is key to getting rich.

Have you ever wondered why the rich get richer?  

By virtue of their wealth, they are able to take advantage of two components:

• time and
• risk.

They are able to set aside money at an early age and watch their savings grow through compounding over time.  The other component is risk.  If you have time on your side, you can afford to take on more risk and invest in instruments that can give you better returns.  The end result is achieving exponential returns on your savings.

The 3 ways to riches are:

• Born Rich
• Rich Professionals
• From Rags to Riches - Entrepreneurs

With time on their side, the rich can afford to take more risk and invest for higher returns.  This means that they would have the "holding power" to ride through any short-term losses.  

In the world of finance and investment, time is really money because money has a time value.  As an economic resource, money is capable of earning a  rate of return which we call interest.  With the compounding effect, your money can really grow exponentially over time.

The Next Level

With sufficient seed money, you get to invest in property, which is one of the favourite investment vehicles for the rich.  Through leveraged investing in property, returns can double or triple in the short term.  In fact, nearly everyone who has invested in property leverages.  For example, an investment of $100,000 can be leveraged 10 X , via a loan, to buy a $1 million property.  A 20% appreciation on the property would be equivalent to $200,000, representing a 200% gain on the initial capital invested.

Other than property, you may be wondering if the rates of return of 10%, 15% or 20% are realistic and possible.  The answer is a resounding 'yes' but you will need to take the risk with a multi-asset portfolio that can invest in equities, bonds, futures, etc.  It must be able to adopt alternative strategies, like investing short and using leverage, to capitalize on market conditions that are constantly changing.  In brief, you will need to include non-traditional investments to your portfolio.

The point is that investment is a continuous process.  You need to keep searching for instruments that can yield returns of 10% or more.  It takes time and effort but it is not impossible.

For those who are risk-adverse and growing their money at fixed deposit rates - the likely trade-off is that they will have to settle for lower returns and thus end up with a smaller retirement nest-egg.  The value of their money will shrink over time as a result of the ravaging effect of inflation and they might just end up poor.  The rich, on the other hand, will most likely attract better opportunities to them.  They will also be able to stomach risk and diversify their assets into different businesses to multiply their wealth.

Get richer.  Understand risk, manage it well and you will be rewarded over the long term.


Ref:  How to be a successful investor by William Cai

The Amazing 7% Annual Growth Rate

Granted, making the first million dollar is the most difficult.  I shan't dwell into this.  But for those who already have this $1 million, they should learn all about the amazing maths behind growing this amount at 7% per year.

What does growing at 7% per year look like?  It means doubling your money every 10 years.  Therefore, if you have $1 invested today, this $1 will grow thus:

00 year - 2010  $1

10 year - 2020  $2

20 year - 2030  $4

30 year - 2040  $8

40 year - 2050  $16

50 year - 2060  $32

60 year - 2070  $64

Study these numbers carefully.  Note the incremental amount of money grown in each of these 10 years period below:

00 year - 2010  $-

10 year - 2020  +$1

20 year - 2030  +$2

30 year - 2040  +$4

40 year - 2050  +$8

50 year - 2060  +$16

60 year - 2070  +$32

In particular, note that the incremental growth for each of the latest 10 year period, exceeds ALL the growth of the preceding years.  Therefore, the incremental growth of the 10 years from 2060 to 2070 exceeds ALL the growth of the previous 50 years from 2010 to 2060.  

Herein lies the power and magic of compounding.  Understanding this is very important to grow your wealth.  Starting early in your investing is extremely important.  Not losing money is important as a moderate growth rate in the absence of losses will translate to a large gain over many years.

Warren Buffett has been investing since his teenage years.  Now approaching his 80s soon, he has been investing for the last 60 years.  It is not surprising that he is one of the richest man in the world as he has been able to compound his money at phenomenal rates for so many years.  What is perhaps worth mentioning is that everytime his wealth doubles over a given period, the incremental wealth for that period exceeds ALL the sum of the incremental wealth for all his previous investing periods.

Now that you have your first $1 million, go forth and multiply.  You need not aim for too high a growth.  A modest 7% annual growth rate over many years can transform this figure into a large number.  Of course, you may be able to do better than this.   You will also be amazed by the numbers that come with an additional 1 or 2% additional growth per year.

Do not make mistakes.  Luck should play little part in your investing.  Investing is fun.  It is safe.  

Ref:

The Rule of 72

http://www.intmath.com/Money-Math/rule-of-72.php

The magic of exponential growth.  What does growing at 7% per year mean to you?

e Most IMPORTANT Video You'll Ever See (part 1 of 8)

Three most important personal factors to consider: Your Time Horizon, Risk Tolerance and Investment Objectives

Through Understanding the Power of Compounding, ANYONE can become rich if they start an investment plan EARLY in life.

It is not so much the increase in future value (FV) over the early 10-year periods of the savings plan, but the increase over the final 10-year period that yields the big bucks.

For instance, if we reference the compounding at 10 percent, 

• FV increased by $41,338 between years 10 and 20, 
• while the increase between years 40 and 50 was $721,316.

Thereafter, if you start your investment plan at age 30 rather than 20, the $1,000 a year you spent before that rather than invested will have cost you $721,316.

The greatest deterrent to an investment plan is not so much the fortitude to put aside a small percentage of income, but the willpower not to steal from the fund until your regular employment income ceases. Anyone can become rich if they start an investment plan early in life.

http://myinvestingnotes.blogspot.com/2008/11/understanding-power-of-compounding.html




Slow and consistent accumulation through the power of compounding. 


Investing is not about making a quick kill, but slow and consistent accumulation through the power of compounding. 


Sometimes, exceptional results will occur through 

• the catch-up process of buying underpriced stocks or 
• excessive market pricing, 

but unless you really know what you are doing, never gamble on chasing quick returns by being enticed to buy on margin.

Most individuals trading in highly leveraged futures are eventually wiped out by their lack of staying power when exceptional price volatility extinguishes their small percentage of equity. 

• Losing a bet in which you can be 100 percent right with your choice but 1 percent wrong with the timing doesn't seem very good odds. 
• Making money is nice, but peace of mind is much more valuable.

http://myinvestingnotes.blogspot.com/2008/11/slow-consistent-accumulation-through.html


Also read:
1.  Uncle Chua's Portfolio & Dividend Income
Here is Uncle Chua's portfolio & dividend income, reproduced here as accurately as was depicted in the book:  http://spreadsheets.google.com/pub?key=r5DhwS2nWTiIAK0pDCIPD-Q

2.  The Story of Anne Scheiber
http://www.horizon.my/2008/11/the-story-of-anne-scheiber/
Maxwell recounts the story of Anne Scheiber, an elderly and thrifty lady who lived in New York and worked for the Inland Revenue Service. When Scheiber retired at age fifty-one, she was only making $3,150 a year. She was treated poorly by her employer and was never promoted. Yet when Anne Scheiber died in 1995 at the age of 101, it was discovered that she left an estate to Yeshiva University worth US$22 million!
How did a public service worker with minimal salary accumulate such a staggering wealth?


3.  *****Long term investing based on Buy and Hold works for Selected Stocks
It sure beats FD rates and it is safe too.
http://spreadsheets.google.com/pub?key=tWENexpUrXS_RMxB7k73RgQ&output=html

The important lesson here is to realize the power of regular investment and compound returns. When you invest in good things and you invest regularly, your wealth will eventually multiply.

Reviewing the Financial Basics of Investment

• Long hours of back-breaking work do not guarantee financial independence.

• You need to work smarter with your money.  Let your money work for you.

• This can be achieved by clever investing and the magic of compounding.  This is the only way in which you can really beat your ultimate enemy, inflation, over the longer term.

Compounding: your ultimate friend

If inflation is your ultimate enemy, compounding is your ultimate friend.

Einstein even called it the eighth wonder of the world - and being the genius he was, he would have known!

Compounding is the best weapon in your arsenal, the one thing that can make your money grow, despite inflation.

Compounding simply means that the returns on the investment grow too, and not only the capital.  It is growth on growth, or interest on interest.

The longer you invest, the more your money will grow.  That is why time is important, and the earlier you start investing the more you will earn.

Delaying your investments is as bad as not investing at all.

Example of Ann and Peter, two young people.

Ann saves $500 a year.  She starts when she is 15 years old and invests in the stock market for 10 years at a return of 20% a year. After 10 years she stops adding money to her nest egg.

Her friend, Peter, only starts to save when he is 40 years old.  After initially squandering his income rashly, Peter starts saving $40,000 a year for 25 years, also at a return of 20%.

Who do you think has the most money at retirement?

• The total amount of $5000 that Ann had saved over 10 years, gave her a grand total of $22.9 million at the age of 65.
• Peter on the other hand, battled to save a total of $1 million and ended up with $22.7 million.

Neither of them will have any financial problems, but the point is that Ann's money grew for 50 years - twice as long as Peter's did, and with much less effort.

How did Ann achieve this?  Not because of:

• the rate of return:  both earned the same return on their investment, nor
• the capital she put in:  Peter put in far more.

But because of:

• the time factor.  Over time, Ann had growth on her money and on her returns.  Compounding is a winning recipe.

The Power of Compounding

No force exerts more influence on your portfolio than time. Time takes a bigger toll on your terminal wealth than do taxes, inflation and poor stock-picking combined. Time magnifies the effects of these critical issues.

A poorly chosen stock may cost you only $2,000 in losses today, but over time that one suspect decision could cost $50,000 in lost opportunities.

Trading frequently for short-term gains may net you strong gains periodically, but the overall result, validated by time, is to create an enormous tax burden that could have been avoided.

Likewise, persistent inflation exacts a weighty toll on your portfolio becasue it destroys value at increasing rates.

Means and end should not be confused. Buffett once wrote to his partners, "The end is to come away with the largest after-tax rate of compound."

What is your optimum Return on Investment?

2008/12/13
Your Money: What is your optimum ROI?

By : Yap Ming Hui

RETURN on Investment (ROI) is an important ally in attaining financial freedom. ROI can help us overcome the threat of excessive spending and inflation. If we are serious about achieving our own financial freedom, it is important for us to understand and know ROI better.

Power of compound ROI

Table 1 shows the compounding effect of RM100,000 invested at different compound ROI compounded over 36 years. From the table, we see that differences in ROI that may appear moderate in the short-term can, with compounding, multiply into very large differences in the long term.



For example, if you don't do anything with your saving which earns about two per cent ROI then. your RM100,000 will multiply by two times to RM204,000 after 36 years. If you transfer the money into fixed deposit, you may earn about four per cent ROI and multiply your RM100,000 by four times to about RM410,000. If you grow your money at eight per cent ROI your RM100,000 will multiply by 16 times to about RM1,597,000. With a slight increase of your ROI from two to eight per cent, you end up having a huge difference of RM1,393,000. (1,597,000 - 204,000). If you grow your money at 15 per cent ROI, your RM100,000 will multiply by 153 times to about RM15,315,000. Of course, increasing the ROI means you may face higher risk of losing your money.

The price of making a mistake

Most people fail to realise the high rate of ROI required to make up for money lost in investment. For example, if you start with RM100 and lose 50 per cent of it, you would have to earn 100 per cent on the remaining RM50 just to get back to where you were at the beginning.

Table 2 shows the ROI required to overcome various losses. The time period is five years, and there are two scenarios: an ROI target of 10 per cent and of 15 per cent.


For example, you plan to increase your money for the next five years with 10 per cent ROI. Unfortunately, instead of getting 10 per cent target return, you ended up with a 25 per cent loss. In order for you to still achieve your original target, you would need to achieve 21 per cent ROI for your money for the next four consecutive years. Now, that's the price you will have to pay for making 25 per cent loss in first year.

Do you think it is easy to achieve 21 per cent for four years continuously? Of course, it is not easy. In addition, you will also notice the spread between the amount of the loss and the required ROI over the next 4 years widens as the magnitude of the loss is increased. The larger the losses, the more difficult it is to overcome. I believe you now understand why the first rule to investing, according to Warren Buffett, is "Never lose your money".

Inflation-adjusted ROI

Our money is subjected to the depletion of inflation. Therefore, to effectively grow our money, we need to attain an ROI higher than the inflation rate.

For example, if the inflation rate is four per cent, the 3.7 per cent interest rate for your fixed deposit will not help your money grow. In fact, in the long run, you lose your money safely. In this case, the inflation-adjusted ROI is actually -0.3 per cent (3.7-4).

Therefore,to grow our money, we need to seek inflation-adjusted ROI.

To achieve financial freedom, you have know what rate of ROI you actually need.There is an optimum ROI rate to target and achieve. This optimum ROI rate should be higher than the inflation rate but not too high that will risk losing money.

Therefore, the challenge for all of us who want to achieve financial freedom is to find out what that ROI is? Do you know what is your optimum ROI? If not, it is always better to find out earlier than later.


Yap Ming Hui is the managing director of Whitman Independent Advisors Sdn Bhd, the first multi-client family office in Malaysia.

http://www.nst.com.my/Current_News/NST/Sunday/Focus/2426202/Article/index_html

**Understanding the Power of Compounding

Understanding the Power of Compounding

Compounding in Action

The investment rate assumes a return net of taxes and fees.
The effect of inflation on the purchasing power of the FV can be offset by increasing your annual contributions by a like percentage. As your income increases, so too should your investment contributions.

-----

The Future Value of investing $1,000 per annum, when compounded by the annual rate of 6% for the number of years are as shown below:

Rate 6%

Years... FV
10 years 13,181
20 years 36,786
30 years 70,058
40 years 154,762
50 years 290,336

The once-only lump sum invested at the same annual rate for the years to provide the same FV as the corresponding sum are as shown here:

Years... Initial once-only lump sum
10 years 7,360
20 years 11,470
30 years 13,765
40 years 15,046
50 years 15,762

A lump sum of $7360 invested for 10 years at 6 percent will produce the same FV ($13,181) as $1000 a year for 10 years.

-----

The Future Value of investing $1,000 per annum, when compounded by the annual rate of 8% for the number of years are as shown below:

Rate 8%

Years... FV
10 years 14,487
20 years 45,762
30 years 113,283
40 years 259,057
50 years 573,770

The once-only lump sum invested at the same annual rate for the years to provide the same FV as the corresponding sum are as shown here:

Years... Initial once-only lump sum
10 years 6,710
20 years 9,818
30 years 11,258
40 years 11,925
50 years 12,233

A lump sum of $6,710 invested for 10 years at 8 percent will produce the same FV ($14,487) as $1000 a year for 10 years.

-----

The Future Value of investing $1,000 per annum, when compounded by the annual rate of 10% for the number of years are as shown below:

Rate 10%

Years... FV
10 years 15,937
20 years 57,275
30 years 164,494
40 years 442,593
50 years 1,163,909

The once-only lump sum invested at the same annual rate for the years to provide the same FV as the corresponding sum are as shown here:

Years... Initial once-only lump sum
10 years 6,145
20 years 8,514
30 years 9,427
40 years 9,779
50 years 9.915

A lump sum of $6,145 invested for 10 years at 10 percent will produce the same FV ($15,937) as $1000 a year for 10 years.

-----

The Future Value of investing $1,000 per annum, when compounded by the annual rate of 12% for the number of years are as shown below:

Rate 12%

Years... FV
10 years 17,549
20 years 72,052
30 years 241,333
40 years 767,091
50 years 2,400,018

The once-only lump sum invested at the same annual rate for the years to provide the same FV as the corresponding sum are as shown here:

Years... Initial once-only lump sum
10 years 5,650
20 years 7,469
30 years 8,055
40 years 8,244
50 years 8,304

A lump sum of $5,650 invested for 10 years at 15 percent will produce the same FV ($17,549) as $1000 a year for 10 years.

-----

The Future Value of investing $1,000 per annum, when compounded by the annual rate of 15% for the number of years are as shown below:

Rate 15%

Years... FV
10 years 20,304
20 years 102,444
30 years 434,745
40 years 1,779,090
50 years 7,217,716

The once-only lump sum invested at the same annual rate for the years to provide the same FV as the corresponding sum are as shown here:

Years... Initial once-only lump sum
10 years 5,019
20 years 6,259
30 years 6,566
40 years 6,642
50 years 6,661

A lump sum of $5,019 invested for 10 years at 15 percent will produce the same FV ($20,304) as $1000 a year for 10 years.

-----

Note:
It is not so much the increase in FV over the early 10-year periods of the savings plan, but the increase over the final 10-year period that yields the big bucks.

For instance, if we reference the compounding at 10 percent, FV increased by $41,338 between years 10 and 20, while the increase between years 40 and 50 was $721,316.

Thereafter, if you start your investment plan at age 30 rather than 20, the $1,000 a year you spent before that rather than invested will have cost you $721,316.

The greatest deterrent to an investment plan is not so much the fortitude to put aside a small percentage of income, but the willpower not to steal from the fund until your regular employment income ceases. Anyone can become rich if they start an investment plan early in life.

Of course, the more you love your work, the longer you will be employed and the more savings you will accumulate. If you find the thought of working until you are 70 abhorrent, then the thought of working at 30 or 40 years of age will be even less attractive; in which case, investing is probably irrelevant because you’re going to have a miserable or unfulfilled life anyway. People who hate working are more likely to become welfare dependent.

Lump sum investing
A lump sum of $7,360 invested for 10 years at 6 percent will produce the same FV ($13,181) as $1,000 a year for 10 years.

A lump sum of $9,779 invested for 40 years at 10 percent will produce the same FV ($442,593) as $1,000 a year for 40 years.

If the same lump sum were invested 10 years earlier – that is, allowed to compound for 50 years, rather than 40 – the nest egg will be boosted by a further $705,372 to $1,147,965.

Have you ever thought about putting something aside for your kids that they can’t touch for 50 years?

Sentiment and moral gratification usually centre on diminishing their incentive to achieve their own sense of self-satisfaction by helping them when they get married or want to buy a house.

If they are like 98 percent of people, the time they really need financial help is after they have lived the good life and have limited savings and no career income.

Material assets are not so important when you have the greatest asset of all: youth.


Related readings:
Oriental Holdings Bhd: The Buy-Hold Advantage
http://www.horizon.my/2008/11/oriental-holdings-bhd-the-buy-hold-advantage/

Oriental Holdings Berhad - What if You had Bought and Held? I happened to be reading the Annual Report of Oriental Holdings Berhad (ORIENT) the other day and came across a statement by Chairman Dato Loh Cheng Yean:

“A holding of 1,000 stocks in Oriental when it was listed in 1964 would translate into 40,255 Oriental stocks worth RM263,670, based on the share price of RM6.55 at the end of 2007. In addition the stocks would have earned a total gross dividend of RM137,660. The gross dividends received and the appreciation in value is equivalent to a remarkable average rate of return of 14.60% for each of the 44 years.”

This sounds pretty good… see once again we’re talking 40 years. I find Oriental Holdings to be quite “remarkable” because it is such a diverse collection of different businesses which include auto assembly, auto parts manufacturing, oil palm, hotels, property etc. But 85% of its RM498 million Operating Profit is from auto and oil palm.



The Story of Anne Scheiber
http://www.horizon.my/2008/11/the-story-of-anne-scheiber/
Maxwell recounts the story of Anne Scheiber, an elderly and thrifty lady who lived in New York and worked for the Inland Revenue Service. When Scheiber retired at age fifty-one, she was only making $3,150 a year. She was treated poorly by her employer and was never promoted. Yet when Anne Scheiber died in 1995 at the age of 101, it was discovered that she left an estate to Yeshiva University worth US$22 million!
How did a public service worker with minimal salary accumulate such a staggering wealth?

Comments by: banking88 on November 25th, 2008 12:13 pm
yes, the key is to invest for the long-term…your wealth would multiply with componding returns…now it’s a good time to enter the market using the dollar cost averaging method…

Slow consistent accumulation through the power of compounding

Investing is not about making a quick kill, but slow and consistent accumulation through the power of compounding.

Sometimes, exceptional results will occur through the catch-up process of buying underpriced stocks or excessive market pricing, but unless you really know what you are doing, never gamble on chasing quick returns by being enticed to buy on margin.

Most individuals trading in highly leveraged futures are eventually wiped out by their lack of staying power when exceptional price volatility extinguishes their small percentage of equity. Losing a bet in which you can be 100 percent right with your choice but 1 percent wrong with the timing doesn't seem very good odds. Making money is nice, but peace of mind is much more valuable.