How much can you make by saving and compounding

[paxmao]

One of the best know says of Warren Buffet is "It is not about timing the market, it is about time in the market". What he means that if you let the interest compound over a long period, the results can be amazing.

Independently of the style of investment (crypto, fixed income, variable rent, high yield, ...), it is good to take a look about what compounding can do for you. Please, note that you would need to subtract inflation and that can be big in some countries if you only invest locally.

These are very simple simulations that shows you how far can your saving and investing go. In each one you put an initial amount on an investment and then you add a bit more each year.

For each case, you get the final amount on money you get depending on the average yield that your investment gives you (this not mathematically accurate, but is good enough. For example, the SP500 index in the past usually yields 6% and is considered a quite safe investment. I have calculated for 6%, 12% and 18%. I call this, the boring 6%, the "nice 12%" and the "the gods love me much 18%" average yield a year.

This will give you the graphs and results for 17 years. Why 17? No particular reason


SIMULATION 1: Initial savings 5000, and you won't add anything else.



As you can see, a final capital of 13.000 is perfectly achievable with a 6% yield, while you can dream of 83.000. This is not bitcoin remember


SIMULATION 2: Initial savings 1000, and 1000 more a year.



Better results overall, with a basic of 31000 and a dreamy 104 if you catch a great decade of yields.

SIMULATION 3: Initial savings 5000, and 1000 more a year.



Better results overall, with a basic of 42,000 and a dreamy 170,000, this looks like a great option.

Notice that this is not USD specific, so 170,000 may not be "dreamy" in your currency. However, if you think of it, it should not be difficult for the average joe to save 100 dollar or euros or pounds a month in OCDE countries, and the effects on retirement can be noticeable. See a previous post on that here.

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[Tytanowy Janusz]

Its funny. Recently I've seen few people talking about that a lot. Few youtube videos. Even whole youtube chanel focused on similar strategy - https://www.youtube.com/watch?v=vffTJV0IzHM

Why its funny? Because we are currently during "bubble of everything". Not only bitcoin is mooning. Everything is. And now, when people like Michael Burry (Big short movie was based on his prediction of 2008 crash) is screaming to watch out - 'Big Short' investor Michael Burry says the stock market is 'dancing on a knife's edge' - and fears he's being ignored again YouTubers appeared out of nowhere, now, with approach that - market is super easy - just buy whatever and hodl. Why not 10 years ago? We have a record number of retail investors on the markets. Even high schools students have robinhood installed and gamble their savings. Mostly on popular stocks, mostly sp500. Every experienced investor should see a red light here. Its not good time for investing in the most overvalued stocks (SP500)

For each case, you get the final amount on money you get depending on the average yield that your investment gives you (this not mathematically accurate, but is good enough. For example, the SP500 index in the past usually yields 6% and is considered a quite safe investment. I have calculated for 6%, 12% and 18%. I call this, the boring 6%, the "nice 12%" and the "the gods love me much 18%" average yield a year.

No. Sp500 is not "a quite safe investment". It is  'dancing on a knife's edge'. Remember "past performance is no guarantee of future results"

[jackg]

I feel the problem with dcaing might be that people get different amounts of disposable income throughout the year (eg holiday seasons). So it's tough for a lot to stick to a tight schedule.

I was investigating the march 2020 drop last year and the s&p500 went down to the price it was in January 2019 (which is a tiny drop to make the news)...



I saw a suggestion for people having children to save £5000 for each when they're born so that they'd have £1.5M when they retire (using a reasonable growth of 10% a year).

That 1.5M would then yield ~£20k a year in income adjusting for inflation of 2% (if you don't cash out the stocks and just mainly get your money from dividends at 4%).

Its funny. Recently I've seen few people talking about that a lot. Few youtube videos. Even whole youtube chanel focused on similar strategy - https://www.youtube.com/watch?v=vffTJV0IzHM

Why its funny? Because we are currently during "bubble of everything". Not only bitcoin is mooning. Everything is. And now, when people like Michael Burry (Big short movie was based on his prediction of 2008 crash) is screaming to watch out - 'Big Short' investor Michael Burry says the stock market is 'dancing on a knife's edge' - and fears he's being ignored again YouTubers appeared out of nowhere, now, with approach that - market is super easy - just buy whatever and hodl. Why not 10 years ago? We have a record number of retail investors on the markets. Even high schools students have robinhood installed and gamble their savings. Its not good time for investing in the most overvalued stocks (SP500)

Some things in the stock market are weird atm and I'm not sure if governments have a plan to get out of them but with most of Europe being over leveraged in almost every way I can imagine they'll come up with a way to make it benefit them...

That being said, the next industrial revolution is claimed to be decentralisation so the more work you can do on yourself and your own skills the better. There's a massive skills deficit in everything atm imo which is a bit of a shame (a lot of people chasing safe money is why jobs pay so low).

[paxmao]

No. Sp500 is not "a quite safe investment". It is  'dancing on a knife's edge'. Remember "past performance is no guarantee of future results"

True, it does not guarantee future results, but long term it is certainly quite safe. It is a well know fact that there is not any period of 20 years in all the SP history that has yielded negative results and, as average, it yields around 6%. In fact, stocks are actually safer than bonds even the popular belief is the opposite.

Even for shorter periods of time, e.g. 10 years, you would really need to buy at a extreme market peak to loose money. See that my post specifies that the results are dependent on the decades that lie ahead, which are said to be not that great.

I do agree with you that during the last 12 months, anyone could make a 25% without much thought.

[Tytanowy Janusz]

Even for shorter periods of time, e.g. 10 years, you would really need to buy at a extreme market peak to loose money.

We are currently at a extreme market peak. Market peak that was never seen before. Its first time that we see a real economy recession without SP500 going down. Stock markets are completely detached from reality,
detached from the real economy. Fed is printing not only tons of money. Its printing new history. Results will be unpredictable. It may end up ok, it may not. We can look back on charts and predict future, but ... history when those charts were taking place painting candle after candle are from different economy situation we have now. Its like driving a car watching in back mirror all the time and predict that we should drive straight only because we were going straight in the past. We should rather look forward and make our decision based on what we see now.

Investing is very hard and comes with huge risk. Don't let youtubers convince you its just "buy the dip and hodl" only because it works for them for few months (especially the most popular sp500) .

[Hydrogen]

The ultimate display of compounding interest I've seen can be found in gambling of all places.

Games in sports with even odds (EV) payout 100% compounding interest on a win.

Which might lead to someone asking: how much compounding interest could theoretically be earned beginning with $0.01 hitting 20 bets in a row at even odds?

$0.01
$0.02
$0.04
$0.08
$0.16
$0.32
$0.64
$1.28
$2.56
$5.12
$10.24
$20.48
$40.96
$81.92
$163.84
$327.68
$655.36
$1310.72
$2621.44
$5242.88

A person could theoretically take 1 cent and compound interest it into more than $1 million dollars. If they could hit 28 bets in a row at even odds.

Its not the traditional financial plan that advisors or get rich quick for dummies book authors would recommend. But like they say thinking outside the box might lend a valuable & worthwhile perspective at times.

Traditional investments, historically follow a similar growth curve (as you've posted). Although I don't know if I would want to be invested in markets in an era when gamestop angles, NFTs and markets were behaving erratically. That coupled with massive stimulus spending and business lockdowns might not be the best idea. Market fundamentals appear to be headed for a negative growth contraction. Inflation protected assets are what will be in high demand. If anyone can acquire reliable access to them.

[franky1]

wallstreet learned this lesson 100 years ago..
wall street doesnt hoard/hodl
they day trade.
because they have such low fees because they are at the central partnership with exchanges they day trade at the micro penny level. taking small amounts 0.05% every hour which add up and add up(1.2%/day)

i learned this lesson in 2012
well. kinda. as i only play with a small percentage of my hoard to avoid risk
but that small allotment .. i dont just leave it on an exchange doing nothing for 100 days hoping to 2x those funds. instead i day traded it
1% a day is better then waiting 100 days for 100%
5k turns to 13k by taking daily 1%..
   1% movements happen soo many times its hard to avoid an oppertunity
5k turns to 10k by waiting for 100%..
   100%(2x) happens so random. it can happen in 3 months or 3 years. no guarantees

so if its good for wall street. its good for smart bitcoin traders. plus its also less risky.. just dont get too greedy thinking you can micro-hodl for 5-10% or you could be losing out by waiting longer. missing out on more the 5-10 opportunities for 1%(netting you 5.1%-10.4% respectively and more frequently)

[Lorence.xD]

If you were to start early and have a lot of money invested that is compounding overtime, say around 10k USD was invested with around 3.875% Annual Rate and a timeframe of 30 years, the total interest  incurred would be around 21,919.35 USD and that is if you only invested the principal amount of 10k USD and not continuously dropping some money every month to increase the principal amount. I think that as a business minded person, we should exploit the idea of compound interest because in our retirement we need a lot of money because we will not be able to work all the time.

[stompix]

I saw a suggestion for people having children to save £5000 for each when they're born so that they'd have £1.5M when they retire (using a reasonable growth of 10% a year).
That 1.5M would then yield ~£20k a year in income adjusting for inflation of 2% (if you don't cash out the stocks and just mainly get your money from dividends at 4%).

I wouldn't call 10% a "reasonable" growth.

Inflation is the problem with all of this, if one in a hundred does this it will not matter if anyone will be doing it then where will all that required value in goods to balance this will come from? The thing works when people buy 1 million worth of bonds but it won't once they try and buy 10 trillion, the bonds will go into negative.
Will it work for the stock market? It will just overinflate the price and then god help you if you're the one just entering retirement when this pops as the first generation that has achieved 100x gains cashes out and only 1/100 gets put back in!

It's one of those things that work best if only you are the one doing it and not on a national scale.
Quite ironic if I think of this twice, you need people to spend around and not save money so you can get a sure profit from saving.

[Poker Player]

-snip

It is clear that investing in the markets over the long term can give us very good returns, especially if we take into account compound interest. A 6% return, OK. 12% is a bit difficult for a retail investor, and 18% is directly impossible.

It is normal to consider that an S&P 500 fund will give you returns of 10% and inflation will take away 3%, leaving you with a net 7%. We have to think that there are people who invest in actively managed funds or other indexed funds that give lower returns. Some may give more, especially in the short and medium term. The SP500 is often considered the benchmark.

No. Sp500 is not "a quite safe investment". It is  'dancing on a knife's edge'. Remember "past performance is no guarantee of future results"

If the Sp500 is not a safe investment, nothing is. Past results, of course, do not guarantee anything, but they serve as a guide. Companies work if they beat inflation, otherwise they tend to disappear. What will the 500 largest U.S. companies do in the next 30 years? If we discount events such as the coming of the third world war, it is normal that they will continue to grow and beat inflation.

I wouldn't call 10% a "reasonable" growth.

Why? It's the average.

Will it work for the stock market? It will just overinflate the price and then god help you if you're the one just entering retirement when this pops as the first generation that has achieved 100x gains cashes out and only 1/100 gets put back in!

This example is too exaggerated. We have no rational reason to think so. We might as well stop going out on the street just in case we get hit by a lightning and it kills us.

[Bttzed03]

I feel like listening to a broker or an insurance agent while reading about compounding. It's the usual marketing strategy 

~ Its not good time for investing in the most overvalued stocks (SP500)

The case where I'm from might not be exactly the same with the US but yeah it's not the right time for stocks.

I'm lucky enough to have joined a group managed by someone who has vast experienced in trading/investing. He's been calling out retail players to be like water and switch to crypto since early 2019 instead of being stubborn losing on stocks.

~
That being said, the next industrial revolution is claimed to be decentralisation so the more work you can do on yourself and your own skills the better. There's a massive skills deficit in everything atm imo which is a bit of a shame (a lot of people chasing safe money is why jobs pay so low).

Are you referring to the Gig economy?

[verita1]

Any technique that is used for savings is good if we talk about the crypto market. I say this because I have been able to save with a small capital with the Staking method for a period of one year. The capital and profit have allowed me to solve family commitments so far this year.
Some have been unexpected such as the sudden trip of a nephew out of the country and another the illness of a relative that with the traditional method I would never comply, I should also mention that I live in a country where inflation affects our quality of life. That is why crypto is playing a great role in offering coin holders the opportunity to save and take advantage of ROI.

[Tytanowy Janusz]

If the Sp500 is not a safe investment, nothing is. [...] Companies work if they beat inflation, otherwise they tend to disappear. What will the 500 largest U.S. companies do in the next 30 years? If we discount events such as the coming of the third world war, it is normal that they will continue to grow and beat inflation.

Undervalued value stock are much better (there are value and growth stocks). As I said above. We have recession now in real economy. Sp500 is mooning. Stock market is currently completely detached from real economy. In next 5 years real economy can shrink 50% while stock value may shrink 90-99%. Its not 1970. Its not 2000. Its 2021. Stock market is now a casino for teenagers. Stock prices does not represent value from real economy. They are not based on fundamentals.

Good stock to invest now is a company with low P/E, with repeatable profits, based on strong tech, with at least 4-5% dividend. Wallet should be diversified to different countries, to different currencies, to different investment products. Its the only way to safe as much purchasing power of your investments in next few years. Of course we may not crash this or next year. But tje problem with "buy every dip and hodl" strategy is that every other strategy creates repeatable profits and protects your wallet, while the other one is like martingale system in casino. You earn,
you make fun of other, more cautious investors unless you hit black swan and whole your wallet is gone.

Past results, of course, do not guarantee anything, but they serve as a guide.

You are looking back to a times where stock markets and real economy were totally different as they are now.

[stompix]

This example is too exaggerated. We have no rational reason to think so. We might as well stop going out on the street just in case we get hit by a lightning and it kills us.

Why?
This what happens with the pension system, contributions go down and spending goes up as the population grows older on average.
The same will happen on any system that needs constant money inflow, in order for somebody to make a profit somebody must come in with that money, when everyone is making a profit, where is the money coming from?
At one point the rate of growth will start going down and if it gets worse the bubble will pop and all your profits will do the same. Of course, the cycle will repeat itself over and over again but the problem is what happens if you're the unlucky one caught at the wrong moment and you won't make it to the next bull run. Besides, my example was targeted at what happens when everybody rushes to those "bulletproof" earning schemes, and we have enough evidence in the past about it.

Saving is good, investing part of your saving is also a good idea, but again, it will not work if every single person on this planet switches to it and thinks now all the money problems in the world are solved.

[Fesatmas]

For each case, you get the final amount on money you get depending on the average yield that your investment gives you (this not mathematically accurate, but is good enough. For example, the SP500 index in the past usually yields 6% and is considered a quite safe investment. I have calculated for 6%, 12% and 18%. I call this, the boring 6%, the "nice 12%" and the "the gods love me much 18%" average yield a year.

This will give you the graphs and results for 17 years. Why 17? No particular reason

let me try to see from the point of personal understanding based on experience in calculating averages that are given when investing. to get an accurate equation, the next most important step is to determine the price at the break-even point.

Usually this method is applied to the break even chart, so that the amount or price can be determined that can break even or create the level of profit sought.

With the equations obtained through the analysis of accounting methods, the calculation of price, break even point, contribution margin and profit is obtained. then we get the existing grudo flat rental price curve. Overall, in the basic concept of investing, the greater the income generated, the higher the value of a property.


If something wrong, let me know right away 

[jrrsparkles]

Apart from all the calculations, compounding the interest is the way to become rich sooner but if you are talking about stocks it may take too long. Which may not be tolerated by someone who is literally new and want to become rich quickly, if they had luck they can be one but 99% they are going to rekt their balance when they are day trading the stocks.

[jackg]

~
That being said, the next industrial revolution is claimed to be decentralisation so the more work you can do on yourself and your own skills the better. There's a massive skills deficit in everything atm imo which is a bit of a shame (a lot of people chasing safe money is why jobs pay so low).

Are you referring to the Gig economy?

I'm not but that's likely going to be part of it.

There's a larger amount of companies that have been moving communications reams to places like India for example for a cheaper rate and this will continue to be done. I don't know if all or many of the larger companies will make it through this (and incurring the losses of waiting for the next quarter to find out if they've made a profit could become problematic).

There are moves to take a socialised approach to old initiatives which may win out of they manage to get enough people interested in using their services (they can still issue bonds instead of shares to raise capital).

There's also companies like uber and amazon doing more tradition gig economy stuff.

[Mauser]

This is an interesting topic you started here. I fully agree with you that long term savings was pretty nice in the past when you were able to get 6% interest. However we are living in an low interest rate world for almost 10 years now. The banks are offering less than 1% on our savings while inflation is atleast 2%. I would argue that saving in the traditional sense is not working anymore. It might be risk free,but it won't yield any returns. If we want to make money we need to take risks and go into more attractive investment forms.

[so98nn]

If that is the best plan then why not enrol into NPS kinda stuff? Like national pension scheme where government could yield you more than 30-40% for your retirement money. Obviously this is all about how much you input into the plan and for how long(!) These things are like how you manage your portfolio right from the beginning. One more thing is, you must start very early in your age. For example, someone's parent inputting money into their child's wealth plan can start as early as their 18th age. If same scheme is applied by someone at the age of 30's then it would turn the returns upside down.

There are many government schemes and if we start them at the right time then one could actually get bigger returns for sure.

[teosanru]

Its funny. Recently I've seen few people talking about that a lot. Few youtube videos. Even whole youtube chanel focused on similar strategy - https://www.youtube.com/watch?v=vffTJV0IzHM

Why its funny? Because we are currently during "bubble of everything". Not only bitcoin is mooning. Everything is. And now, when people like Michael Burry (Big short movie was based on his prediction of 2008 crash) is screaming to watch out - 'Big Short' investor Michael Burry says the stock market is 'dancing on a knife's edge' - and fears he's being ignored again YouTubers appeared out of nowhere, now, with approach that - market is super easy - just buy whatever and hodl. Why not 10 years ago? We have a record number of retail investors on the markets. Even high schools students have robinhood installed and gamble their savings. Mostly on popular stocks, mostly sp500. Every experienced investor should see a red light here. Its not good time for investing in the most overvalued stocks (SP500)

For each case, you get the final amount on money you get depending on the average yield that your investment gives you (this not mathematically accurate, but is good enough. For example, the SP500 index in the past usually yields 6% and is considered a quite safe investment. I have calculated for 6%, 12% and 18%. I call this, the boring 6%, the "nice 12%" and the "the gods love me much 18%" average yield a year.

No. Sp500 is not "a quite safe investment". It is  'dancing on a knife's edge'. Remember "past performance is no guarantee of future results"

I think this theory & long term investment does not focuses on knife's edge theory. For example Warren Buffet was one of the biggest loser at the time of 2008 Crash because most of his stocks would have crashed terribly and there is no chance he can sell of that large amount of holding quickly so all of his loss was unrealized loss which has eventually turnwd now intor profits. But market always does recover and when it does even the 2008 crash looks like a small correction. But yes it's risky if you are expecting to take out money in short term like 4-5 years. When we say average 6% yield it's obviously no guaranntee that you get a 6% each year but some years would average out the others. This is how this theory works.