——Re -understand compound interest formula ②——Principal
This article explores the effect of the amount of principal on compound interest, keeping the rate of return fixed at 7% and the period of time is 50 years.
Ps1: Do not consider the issue of capital capacity
Ps2: Principal does not mean how much money you have, but how much money you invest
F=P*(1+i)^n (F: future value P: present value, i: yield n: years)
Situation 1: The initial investment is not much, and there has been no additional investment
Some people do not have much principal, and some people only use a small part of the assets for investment with the mentality of having fun and joining in the fun.
Assuming that only 50,000 principal is invested, after 50 years, the wealth will become 1.473 million.
To be honest, investing only this amount of money cannot be regarded as an investment. It is purely entertainment, and you should not invest too much energy. Otherwise, it took 50 years to earn more than one million yuan, and the cost performance is too low.
Conclusion: Buffett emphasizes concentrated investment, not only a high concentration of positions, but also to invest most of the funds in the assets.
Situation 2: The initial investment is not much, but it has been continuously invested
Although some people have little principal at the beginning, they have the awareness of investment and financial management, and have been trying to save money for investment and financial management.
Assuming that the principal is 5 years and 50,000 is invested every year, after 50 years, the wealth will become 21.799 million. A total of 2.55 million principals were invested.
It can be seen that, after a little difference in concept at the beginning, 50 years later, it has earned 20 million more than Case 1. This is where people often wonder: why is that person not much smarter than me, and his income is much higher than me, why is he so rich? In fact, it is the first little difference in concept.
Conclusion: Even if we don’t have a lot of money at the beginning, as long as we keep investing, we can still get good returns.
Scenario 3: A lot of capital is invested in the initial stage
Some people are born with good family conditions, and such families often have better financial awareness. Assuming the initial investment of 2.55 million principal, after 50 years, the wealth will become 75.115 million.
The same investment of 2.55 million, the result is 53 million more than the case 2.
Conclusion: The compound interest game of rich people is different from that of ordinary people. Rich people will get richer and richer when they invest, and they will widen the gap with ordinary people.
Scenario 4: Not much capital invested, but high yield
Some people will definitely think, my family was not born well, can I work hard to improve my rate of return so that I can catch up?
Assuming that the initial principal is 50,000 and the rate of return increases from 7% to 15%, after 50 years, the assets will become 35.012 million. The yield has doubled, and the asset is still half as low as in Scenario 3.
Still the above conclusion: even if you are a genius, if the principal is not much, you are still no match for a rich person with a mediocre IQ (of course, if you are really good, you can help the rich make investments). There is more than enough to be better than others. High returns have at least helped you achieve a class leap, and your descendants will hopefully catch up with him.
Scenario 5: Invest with spare money and increase leverage cautiously
Others may think, I don’t have much capital, but I can add leverage and get closer to the starting line of the rich.
This kind of thinking is very dangerous. We know that A-shares fluctuate greatly, and sometimes it is normal to drop by 50%. Assuming that half of your funds are leveraged, at this time you will face liquidation and lose everything, and the subsequent rebound has nothing to do with you.
Once the principal is gone, it means quitting the game. No matter how high your rate of return is, if you don’t have the principal, it is useless.
Suppose again that you have some of the money that you will use in recent years, such as getting married or buying a house. We know that A-shares may sometimes bear bear for 3 or 4 years. If you put this part of the capital into the stock market, it happens to be in a bear market for several years in a row, and this part of the money has shrunk significantly, then what should you do with your business? To sell or not to sell?
Conclusion: When investing in financial management, it is best not to add leverage, and the duration of the funds should match the investment varieties. For short-term funds, you can choose some stable and less volatile varieties. The stock market is more suitable for long-term funds of more than 5 years.
Scenario 6: Efforts to increase the principal in the early stage, and efforts to increase the yield in the later stage
I think the best way is: when you are young, you don’t have much capital, you should work hard and accumulate more capital. When it is difficult to increase the principal in a large proportion in the later stage, then focus on hard work.
Assuming that there is no principal at the beginning, 0-15 years, work hard to make money, invest 100,000 every year, and don’t pay much attention to investment and financial management, and the rate of return is 5%. In 2015, the assets became 2.158 million. At this time, the invested principal was 1.5 million, and the investment income was not much.
In 15-50 years, the job is stable, the principal increases by 30,000 per year, and the investment rate is increased to 8%. By 50 years, the assets became 37.074 million.
The total invested capital is also 2.55 million, and the compound annualized rate of return is almost 7%. But the final return is much better than Case 2 (21.799 million).
Conclusion: You should earn more principal when you are young. When it is difficult to increase the principal in a large proportion, you should work hard to increase the rate of return, so that the total income will be better.
Conclusion: What is the most important indicator in the compound interest formula? Most people said yield, some said principal. In fact, the correct answer is the investment period .
Or to put it further, investing earlier and living longer is the most important thing in investing. We will talk about this topic in the next article, and you are welcome to continue to pay attention to us.
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Reminder: The fund has risks, and investment needs to be cautious! This article is only for personal research and analysis, not as an investment basis, and operate at your own risk.
Related reading: This article will subvert your understanding of compound interest, let’s talk about yield first
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