Intelligent
Investment Pieces
Learn about key pieces of the investment puzzle and simplify the unnecessarily complex world of investing.
"Mankind's Greatest Discovery" - 1 of 6
Compound Interest – Einstein calls it "mankind's greatest discovery"!
Growing your money is a function of two things:
The rate of return you receive on your money multiplied by the amount of time (in years) you invest it .
Here's a quiz. Can you figure out the Rule of 72?
| % Annual Return | Number of Years Invested |
|---|---|
| If you earn a return of 2%... | you’ll double your money in 36 years. |
| If you earn a return of 3%... | you’ll double your money in 24 years. |
| If you earn a return of 4%... | you’ll double your money in 18 years. |
| If you earn a return of 6%... | you’ll double your money in 12 years. |
| If you earn a return of 8%... | you’ll double your money in 9 years. |
| If you earn a return of 12%... | you’ll double your money in 6 years. |
Dividing 72 by your annual return, will tell how many years it will take you to double your money.
Cool, eh??
Younger, but wiser
My youngest daughter learned this rule at the tender young age of 12.
My eldest was pitching a proposal that she should quit her job and spend her savings on a trip. We were having a family discussion about whether or not she should do that.
Enter my young daughter with her sage advice, "If you just wait nine years, your money will have doubled. You can spend the money you have earned on a trip, and still have your job and original amount of money."
Have I told you that my youngest has a natural affinity to all things that glitter? Luckily, she also has an affinity to math.
What does it mean for you? Let's do a little math
Let's say you plan on hanging up your skates when you turn 65. Let's also say you can make 9% on an all-equity portfolio – that means your money will double every eight years! Finally, let's say you are 25 years old right now.
If you are 25, and you invest $1,000 per year at 9% until you are 65, you will have $337,000 by the time you reach age 65.
Here is the fun part!!! If you leave the money alone for only eight additional years, you would have $684,000. Wow wow wow!
"Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did do."
– Mark Twain
Some history for you (if you are interested)
Over the last 58 years, (that’s all of the data Statscan had), the Toronto Stock Exchange (TSX) annualized capital increase (or, in plain English, growth), excluding dividends, has been 5.5%.
Over the last 58 years, the average dividend yield on the TSX has been 3.1%.
So, by adding the historical TSX capital increase of 5.5% plus an average dividend yield of say 3.1%, indicates a total return just shy of 9.0%.
That means, if your investments matched the TSX performance over the last 58 years, your money will have doubled about every eight years.
However, past performance does not guarantee future performance. Considering that the current interest rate environment is lower than it was in the past, future stock return expectations could generally be lower than what has been achieved in the past.
"A journey of a thousand miles must begin with a single step."
– Lao Tzu