1. Benefits of Stock Investing
What benefit does an stock investor have? The following diagram illustrates this:
For the average young to middle aged adult having around $10000 to $50000 worth of savings, the average bank around the world gives you an interest rate of less than 3% per annum. In Singapore, which is where I reside, the average deposit rate is less than 1% per annum, which is pathetic to say the least. Instead of allowing your hard earnings savings to depreciate in value with interest rates which are less than the inflation level (3-4% in Singapore), why not invest the time and effort in learning how to manage your own portfolio of stocks which can generate around 10 to 15% per annum? (Some of you may be skeptical about this number and the next chapter addresses some of these issues. For now, let us first carry on with this argument)
What is the benefit of having 10 to 15% of interest per annum instead of 1 to 3%? Here, allow me to show you the power of compounding.
Table 1 show $20000 invested at Year 1 with 1.5% interest per annum simulating a bank deposit rate. As you can see, the ending balance each year is brought forward to the next year and this amount will be used to compute the interest for that respective year. One thing to note is that although the interest rate is similar to the earlier year, interest earned is higher due to a higher starting amount. Therefore, your savings, even though you did not put in additional capital, continues to generate more interest than the previous year. This is what is termed "Compounding". At an interest rate of 1.5% per annum, an initial savings of $20000 will generate approximately $25000 at the end of 15 years, a total return of 25%.
Now, let us look at table 2. All the assumptions in the first scenario hold, except for the fact that the interest rate has been changed to 15%, to reflect what an individual stock investor could potentially earn in the market on an average basis. You can see that in the early years, the difference in the ending balance is not great but when you look at the later years, especially at year 15, your $20000 in investments has generated a total of approximately $160000, a return of more than 700%! That, my friends, is the power of compounding.
As you can see, with just an initial savings of $20000, with some time and effort put in the market through managing your own stock portfolio which could potentially generate an investment return of around 15% per annum on an average basis, you can allow your hard earned savings to generate income by itself. A perfect strategy would be to hold on to your day job and do this on a part-time basis which allows your future earnings to continue generating returns through stock investments in the market, enabling you to achieve financial independence much earlier with a well managed portfolio.
Disclaimer: I must state here that a 15% return every year is NOT guaranteed and returns will definitely differ from year to year due to movements in the market. There may even be some years which you may generate losses, like in the 2009 financial crisis, where the market lost almost 60% of its value. I do not deny that investments are volatile on a day to day basis and are not for faint hearted. However, I am a great advocate of value investing and I am confident that if you make sound investment decisions and you have a strong mind to hold on to your good stocks through bad periods, an average return of 15% through 10 to 15 years will not be beyond you. The next chapter goes on to dispel further some of the myths of stock investing; which I hope will give you a better understanding and passion for investments.Now, lets move on to the next chapter: Demystifying the Myths of Stock Investing
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