Great Hunt: Are you interested in investing your money?

AndyT678

I agree 2% is poor but I don't think I'd call 7% conservative either especially if you consider inflation.

However, the point of the comic is that Ms Stick needs to keep on adding not just rely on the "magic" of compounding. If she contributes $100 per month for 10 years she'll have $13,000 before any compounding is applied. That's the real magical force.

Prince_Peter

@ AndyT678

You have missed the point ( in your cartoon). Unless it was simply to be devils advocate.

First, are you talking on an hourly , weekly, monthly or yearly basis? As I trade, I 'll take that as an hourly basis or take a medium term view and say a monthly basis.

Second, yes if you continue to add to the pot and not take away that is the power of compounding.

Malthusian

AndyT678 wrote: »

I agree 2% is poor but I don't think I'd call 7% conservative either especially if you consider inflation.

I did specify that it was before inflation. The cartoon ignored inflation so to be consistent so did I. 7%pa is lower than the average 10-year return for a fairly conservatively invested portfolio (60% equities) for about 20 years' worth of 10-year periods. Obviously, the doom merchants could be right and returns over the next ten years could be 2% after inflation. However, if it is, returns will have been much lower than the average. It's a conservative estimate for a conservative portfolio. And there is no reason Ms Stick Figure needs to use a conservative portfolio - a higher equity content would improve likely returns still further.

Whether 7% is the right percentage is beside the point. The point is that 2% is definitely the wrong percentage to use when talking about a 10 year investment.

However, the point of the comic is that Ms Stick needs to keep on adding not just rely on the "magic" of compounding. If she contributes $100 per month for 10 years she'll have $13,000 before any compounding is applied. That's the real magical force.

I think the point of the comic is that the author knows a lot about maths (and science in general) but not so much about investments.

I don't have a problem with the conclusion of the comic "you can't rely on investing to make you rich so you need to invest in your own intellectual capital" but I do with the alternative conclusion "you can't rely on investing so you may as well spend all your money".

AndyT678

I totally agree with you on 2% being the wrong number.

What had never crossed my mind was your alternative conclusion that "you can't rely on investing so you may as well spend all your money". Ms Stick isn't off on a spending spree in the final panel. Instead she's recognised that a much faster way to increase her wealth is to earn more.

It was only ever an attempt to suggest that earning more and spending less will make most people far more money than any compound effect, especially in the early years.

Eco_Miser

Malthusian wrote: »

I think the point of the comic is that the author knows a lot about maths (and science in general) but not so much about investments.

I don't have a problem with the conclusion of the comic "you can't rely on investing to make you rich so you need to invest in your own intellectual capital" but I do with the alternative conclusion "you can't rely on investing so you may as well spend all your money".

I first saw that cartoon when it was first published, and I've always believed it referred to a deposit account paying 2% compound interest - which over 10 years pays a whole $19 more than 2% simple interest. Hardly 'the eighth wonder of the world'.

Malthusian

Yes, I read the cartoon as well.

The point is that you would not put a ten-year investment in a deposit account paying 2% interest, unless you are an idiot. And if you invested in something more appropriate, which returned, let's say 7%pa*, compound interest means you almost double your money. And the difference between compound and simple interest using a more appropriate interest rate is not $19 over 10 years but $267 - a quarter of what you put in. It's not magic or the eighth wonder of the world, it's just maths. But anyone who thinks it's insignificant is very welcome to write me a cheque for $267.

(*it could be more, it could be less, but no purpose is served by pretending that a properly diversified ten-year stockmarket investment is going to return nothing)

Over a twenty year timescale using the same interest rate, over half your returns come from the "magic" of compounding rather than the return itself. ($3,870 v $2,400 - subtract the initial stake and the former is double the latter.)

Saying that compound interest is of little use because 2% compounded doesn't do much is like saying that electricity is of little use because a car connected to a potato battery won't go very far. The problem is not with the physical force, the problem is that you aren't using the correct amount.

BananaRepublic

AndyT678 wrote: »

I agree 2% is poor but I don't think I'd call 7% conservative either especially if you consider inflation.

However, the point of the comic is that Ms Stick needs to keep on adding not just rely on the "magic" of compounding. If she contributes $100 per month for 10 years she'll have $13,000 before any compounding is applied. That's the real magical force.

7% is pretty conservative in my book, going by my own investments over ~20 years.

Voyager2002

MrsAverage wrote: »

I've just done a really useful free online course with ww.Futurelearn.com all about investing, if, where, when and how. run by the OU, it was only a few hours for a few weeks but taught me so much. would highly recommend it
Its called Managing My Investments and next start date is late August
https://www.futurelearn.com/courses/managing-my-investments#section-dates

The whole course is sitting there on-line, so you can study it at any time. The only reason to wait for the next start date would be if you wanted to pay them to get a certificate.

And yes, the course is very useful.