Compounding over 40 years

Play!

Hi, im relatively new to all this investment talk but it has my attention so bare with me.

Im 21 and plan to invest up to my 60-61st birthday. I have a plan to take a percentage of my income, invest 50% in some things low risk (savings accounts etc) as to give me some security and invest the other 50% on schemes in which I may lose the lot. Im interested in this compounding and have a fairly basic grasp of how it works.

So now you have a basic idea of what im thinking I have a few questions.

Has anyone tried a method like the one above?

Has anyone had any luck with or know anything about compounding?

Is there a better way than this to guarantee a happy retirement?.

Hope this makes some sence to you all.

Robert_Sterling_3

e.g. one

5% compound interest over 40 years would multiply you investment by seven.
However price rises over 40 years might reduce the purchasing power of the final £7 to lerss than the purchasing power of the original £1.

In my life time the price of a newspaper has gone from one old penny of which there were 240 in one pound to over one pound for the times or the telegraph on a sunday.

The delivery charge for newspapers has gone from 1 old penny per week to £1.50 per week. i.e. The cost has been multiplied by 360.

deemy2004

Play! wrote:

Hi, im relatively new to all this investment talk but it has my attention so bare with me.

Im 21 and plan to invest up to my 60-61st birthday. I have a plan to take a percentage of my income, invest 50% in some things low risk (savings accounts etc) as to give me some security and invest the other 50% on schemes in which I may lose the lot. Im interested in this compounding and have a fairly basic grasp of how it works.

So now you have a basic idea of what im thinking I have a few questions.

Has anyone tried a method like the one above?

Has anyone had any luck with or know anything about compounding?

Is there a better way than this to guarantee a happy retirement?.

Hope this makes some sence to you all.

Its called a portfolio

And its a range of risks between high and low.

I.e. say split your savings & investments into

50% zero risk i.e. savings accounts, savings certificates, fixed bonds etc.
25% low risk i.e. government stock, 'safe/ boring' investment trusts,
15% medium risk - regional investment trusts that spread the risks in overseas countries, individual big stocks such as oils, utilities etc
10% high risk - small oil companies, tec stocks etc..

My portolfio at this moment in time is
No risk 75%
Low risk 7.3%
Medium risk 15.1%
High risk 2.6%

When the stock market goes up it increases the overall return of the portfolio, if the stockmarket falls then it will be a drag on the portfolio but not enough to put a major dent into it.

Play!

Thanks for the help. Much appreciated.

Im going to do more research on this and I may be back sometime soon with a better understanding, so I can discuss it properly.

Thanks again.

cheerfulcat

Play! wrote:

Has anyone had any luck with or know anything about compounding?

Hi, Play,

There are calculators available on the net which will work out results of various scenarios for you, including compounding and, as Robert Sterling says, the effects of inflation ( very important and often forgotten ); here are a couple -

Asset allocator http://www.schaeffersresearch.com/personalfinance/calculators/AssetAllocator.aspx

Investment returns
http://www.schaeffersresearch.com/personalfinance/calculators/InvestmentReturn.aspx

HTH

Cheerfulcat

Play!

Thanks for the links, those calculators are better than others ive come across.

If ive understood what ive learnt so far I need to have the right asset allocation and stick to it. My rate of interest will depend on how well I invest and for the compounding interest to work I must leave the interest where it is as to keep getting interest on the interest aswell as the monthly investment. Is this correct?

I have calculated how much I will need to invest each month and the avg anual interest rate would need to be between 11% and 15% over the 40 years. Is this realistic?

Are there no money savers out there doing this already?.

Hope this makes some sence, if not, its back the the drawing board.

cheerfulcat

Hi, Play,

Asset allocation is important but bear in mind that you will have to tailor the shape of your investments to suit your own particular ideas and circumstances - there are templates for asset allocation available and even computer programmes but nothing beats personal input and study. You might like to read The Intelligent Asset Allocator, by William Bernstein. As for sticking to it...well, I would say stick to the principle but be flexible.

Your rate of return will indeed depend on how well you invest, as well as what you invest in - shares return more than bonds, which return more than cash ( all of this is as a general rule and it ain't always necessarily so :-) ). The rule is higher risk should be rewarded with higher return.

Compounding works whether you leave an investment in the same place or move it around; the important thing is that the returns, whether interest, dividends or proceeds from the sale of an asset, are re-invested.

An average annual return of 11%-15% is perfectly possible.

HTH, and best of luck.

Cheerfulcat


PS If you want to discuss the finer points of investing on a forum free of censorship ( investment discussion is sort of frowned on here ), have a look at The Motley Fool; both the Fool School and the discussion boards are well worth a visit.

http://www.fool.co.uk/help/sitemap.htm?NavLoc=LN&NavFrom=home&NavTo=sitemap

The Investment Strategies board might be of interest

http://boards.fool.co.uk/Messages.asp?mid=9570053&bid=50090

Play!

Thankyou, very helpful. I'll check the boards out that you've posted, maybe I'll see you there sometime.

deemy2004

Play! wrote:

I have calculated how much I will need to invest each month and the avg anual interest rate would need to be between 11% and 15% over the 40 years. Is this realistic?

Are there no money savers out there doing this already?.

yeh I do, and no, Ive not averaged 11 to 15%... especially in the dark days of the recent bear market.

At the moment my overall 12 month rolling return is 9.08%... which is a very good 12 months !

A bad year... don't even ask about a bad year

But your expectation of 11 to 15% average over 40 years is perhaps a little high... well unless we have hyper inflation ... if we continue to have inflation between 1 to 3% you should perhaps scale your expectations down to to 5 to 8%, not unless you live in China or India with GDP growth of about 8%. britians of 1.5 to 3.5% is not enough to give you an average return of 11 to 15%.

Offcourse it depends on your portfolio make up, the higher the risk weighting the greater the volatility you will experience from year to year.