|
|
He is good at math, but wants the number of years reduced to three, saying it'd be easier to calculate. I gave him a calculator to do the original problem I had given him. He returned a number – 230,025.60.
I asked him if he could invest that money for that many years for this return? After a long pause, he said: "How much return will I get in one year?"
He just told me an investment of Rs.6000 could turn to Rs.230k plus in 20 years. But, he now wants the math for one year.
Though I appreciate his situation (cash flow, not value growth is important in retirement), it kept me thinking. I think and think and . . .
If he invested Rs.6000 in a fund, which grew 20% every year for 20 years, he would have Rs.230K now. (And he could invest more than 500 a month 20 years ago and could invest 15000 a month five years ago. That sums, if he did invest, would have grown to a nice sum now. Nothing happened.)
Do you plant a seedling today in hopes of plucking its fruits tomorrow? The obvious answer is no. However, when it comes to investments, people believe the seedlings become plants and bear fruits in a few days.
You read about a well-managed fund giving 30% returns per annum. (Mutual funds giving returns 70% is not rare in India, thanks to the Bull Run).
If a fund can give you returns of 20%, your money can double in just four years. Many so called investors are happy to redeem their earnings, once they see their money doubled in less than four years.
If you close your account at this stage, you miss major gains.
You read it right. You are missing out major opportunities, even if you see your money doubled in four years or less.
Leave the investment running for another four years. Your investment quadruples. Leave your investment for 15 years in total, growing at 20% and you see your investment growing by 15 times.
Keep invested in additional number of years and you will see your investment growing more times than the number of years. Stay invested for 20 years and you will see your money growing by more than 38 times. Stay invested for 25 years and you will see your money growing by 95 times. Stay invested for 30 years and you will see your money growing by 237 times.
OK. No one can expect a fund to grow by 20%, consistently for 30 years. I agree. There will be dips in the market, corrections, recessions, etc that will negative affect the performance of your investment.
However, with a professionally run company, you can normally expect a return of 15%, even in volatile market conditions.
How much will your money grow if it is growing by 15% per year?
5 years – 2.01 times
10 years – 4.04 times
15 years – 8.14 times
20 years – 16.36 times
25 years – 32.91 times
30 years – 66.21 times
There is no comparison of 237 (with 20% growth) and 66 (with 15% growth). The point is find funds capable of giving your returns more than 15% (investing in index funds can give you that returns) and keep invested in the fund long enough, for the money to grow and bear more money for you.
Disclaimer: I used the following formula to calculate returns.
FV = PV (1+r)^n
PS: I am not good at math. It will be helpful if you do your math and correct me if some errors have crept in.
Yet, my point is simple - by maximizing n, which is the number of years you allow your investment to grow, you will also maximize the chance of multiplying your money.
To maximize the advantage of n, keep investing and stay invested for as much as you work and earn.
See what Motley Fool has to tell about this formula.
