How To Invest Your Money?

How To Invest Your Money?

So we now know it is even more dangerous to save your money than investing it. Now let’s look at what are the potential returns you can get by investing in stocks of good companies.

Let’s look at the table below for comparison by having some assumptions:

  1. Buying the stocks for 20 years without selling it even during all the recessions.
  2. Exclude collecting dividends from the companies.

For simplicity, I am using the share prices of three of the biggest companies in the word:

  28th February 1992 (20 years ago) 27th February 2012 Average Annual Return % Total Return (%)
McDonald $10.12 $100.36 49.5% 991%
Exxon Mobil $14.28 $87.23 30.5% 610%
Wal-Mart $13.50 $58.46 21.6% 433%

As you can see, the average annual return is way ahead of inflation and saving interest rate! Who says money does not grow?

Can You Further Increase The Return?

Of course you can! If you pick up the right skills to get in and out of the stocks (good companies of course) during all the ups and downs of the stock market, you can magnify your return.

The trick is to leverage on the power of compounding return. The formula of compounding return is by continuous investing the total return with the profit year after year. Here’s how it works:

Let’s set our target at getting minimum 20% return every year with a $10 initial investment by utilizing the effect of compounding return, and see what happens after 20 years.

Year Investment Total Return
1 10 10 + (10 x 20 / 100) = 12
2 12 12 + (12 x 20 / 100) = 14.40
3 14.40 14.40 + (14.40 x 20 / 100) = 17.28
4 17.28 17.28 + (17.28 x 20 / 100) = 20.74
5 20.74 20.74 + (20.74 x 20 / 100) = 24.88
6 24.88 24.88 + (24.88x 20 / 100) = 29.86
7 29.86 29.86 + (29.86 x 20 / 100) = 35.83
8 35.83 35.83 + (35.83 x 20 / 100) = 43.00
9 43.00 43.00 + (43.00 x 20 / 100) = 51.60
10 51.60 51.60 + (51.60 x 20 / 100) = 61.92
11 61.92 61.92 + (61.92 x 20 / 100) = 74.30
12 74.30 74.30 + (74.30 x 20 / 100) = 89.16
13 89.16 89.16 + (89.16 x 20 / 100) = 106.99
14 106.99 106.99+ (106.99 x 20 / 100) = 128.39
15 128.39 128.39 + (128.39 x 20 / 100) = 154.07
16 154.07 154.07 + (154.07 x 20 / 100) = 184.88
17 184.88 184.88 + (184.88 x 20 / 100) = 221.86
18 221.86 221.86 + (221.86 x 20 / 100) = 266.23
19 266.23 266.23 + (266.23 x 20 / 100) = 319.48
20 319.48  

Average Annualized Return –> ($319.48 / $10 x 100 / 20 years) = 159.74%

Shock? That’s the amazing power of compounding effect.

What Are The Risks?

Yes there are risks, the maximum risk you will get is to lose all your money if you:

  • Invest your money with a lousy company.
  • Sell away your stocks during irrational market panic, remember, market will always go up eventually. Look at the historical performance of stock index if you do not believe me.

How Do I Achieve The Maximum Return?

The key learning here is to buy at the price when good companies are undervalue, sell at the price when the companies are overvalue.

There is no free lunch in this world. To invest successfully, continue to educate yourself to be financially literate. The learning process never stops.

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