Mistake in this week's IC?

theshortstack

Morning all,

I've just been reading through the latest edition of IC and come across the "Reach your (ISA) target in 27 years" on page 39.

Now I'm no maths expert (as I'm sure I'm about to find out), but as a bit of a noobie to investing I wanted to go through the numbers to figure out how they worked ... and I think the second number in the third column (the one that currently reads £27,341) is wrong.

I wanted to run it past you though just to make sure that I'm not missing something myself.

I would assume that that number should be the sum of the value of the ISA pot from 2013 (£11,520) and the total annual allowance for 2014 (£15,000) with 5% added on top for assumed long term performance.

i.e

(11,520 + 15,000) * 1.05

If that's the case, then the number in the third column should read £27,846 which is kind of a big deal because if you go on for there, I reckon you can hit your target a year earlier.

So what have I done wrong here?

theshortstack

Probably should have waited until I got home and posted a screenshot, but have got one now to highlight my point:

bigadaj

I assume they've allowed the growth to only apply to that for the previous year.

The main thing though is that whilst these projections are useful guidance they are based on a load of assumptions. You almost certainly aren't going to get 5% growth per year, and certainly not exactly 5% every year, so it would be better to vary that. Let's face it if you're heavy in equities you could easily be down 15% one year and up 20% the next or vice versa, so a few hundred pounds is neither here nor there even with the effects of compounding.

Linton

Have you noticed that the first "year" is actually 15 months?

So the answer is close to 11520*1.05^1.25 the original 11520 for 15 moths
+ 11520*1.05^0.25 The first part of the second year allowance for 3 months
+ 3480 the rest of the allowance from July 2015

Which gives: 27385

So not too bad, though not exactly what they give.

theshortstack

Thanks very much your thoughts - I wasn't trying to be the picky trainspotter here, I just wanted to understand the maths in order to get a better grip on investing basics. I won't take it too literally then.

Cheers for your help - much appreciated!