Compounding Interest… It’s Grrrrreat!
Comments (0) In a recent post, I had dabbled in the idea of compounding interest. That was just the tip of the iceberg. Today, I learned something even more incredible and worth sharing. Ever since that last post, I wanted to figure out why more people are so excited about compounding interest. I mean I can figure out how long it will take for me to double the amount of money just by using a simple calculation, but why was this important?
To my surprise, the answer was right in front of me. Well, not really in front of me, but it was in the form of a podcast I was listening to. I subscribe to Doug Fabian’s podcast. The author of “Maverick Investing”. Even though I listen to him on a daily basis, I was never intrigued with what he had to say. But recently he had his dad, Dick Fabian, come on the show and explain the idea of trend following and importantly compounding interest. For some reason Dick Fabian had an incredible appeal where I was paying more attention to what he had to say. You can tell he was very passionate about the subject even to this day after retirement.
After his interviews, I went to visit his web site and found his document explaining the power of compounding. It basically described how you can invest $100,000 and retain an earning of 20% every year for 15 years, you will earn $1.5 million. That isn’t the amazing part. The amazing part is that the earning is equivalent to gaining 96% return on the initial $100,000 every year until 15 years. Meaning even though you’re gaining 20% annual on your lump sum, because of compounding interest where the interest is applied to the lump sum plus all previous gains, you’re actually getting more than 20% every year and eventually returning a much higher interest as you let the amount compound. This to me is truly amazing since you don’t need to find an investment that yields higher than 20% to get a higher gain. All it takes is time and working to find investments that gives you at least 20% gains. He quickly points out that there are hundreds of mutual funds that yield that much or more. All we need to do is go to the library to see the year-end edition of Barron’s, WSJ, or USA Today to look at mutual funds listings. And more importantly, if you use his worksheet, you can monitor your investment every week to make sure they are retaining a 1.67% growth every month. Why 1.67%? That’s 20% gain for a year (1.67% * 12 = 20%). I think I might just subscribe to this trend following methodology in investing. Its basically monitoring the trends using the 200-day moving average, which you can get from Finance Yahoo! page for any symbol you’re looking up. I’m sure there’s more to this so I’m going to find out what else I need to do. But for now, the reality of possibly retiring a millionaire by age of 45 is a reality and not a dream.
Themocracy