Personal Brokers help to understand, how to form a long-term portfolio and not be distracted by news noise. Today we'll talk about compound interest, which will help the investor get more from their investments.
Wealth Management Consultant
Alexey Loginenkov, personal broker
Every public company faces a choice: pay dividends or invest profits back into the business. When business growth slows down, the company will choose the first option, to "retain" investors through dividends. In the second case, the company directs money to its own development.: hires personnel, buys new equipment, runs ads. This investment will increase the fundamental value of the company., it will be able to earn even more - which ultimately can lead to an increase in the value of shares..
It turns out, what reinvested today can increase profits tomorrow - this is the essence of compound interest. Such interest is accrued on the principal amount invested., and on the income already received. To compound interest work in investments, you need to reinvest the profit: for example, buy securities for received coupons or dividends.
American teachers, explaining, what power does the combination of percentage and time have?, tell a story about Manhattan. IN 1626 G. colonists bought the island of Manhattan from the indigenous people for $24. If residents placed this amount under 8% per annum (and this is the average annual return of the American stock market over the past two centuries), then in 2020 G. $24 would turn into $354 trillion. That's enough., to buy all real estate in the world and shares of all companies.
Let me give you another example. The investor saves for a decent pension, which will come out through 32 of the year. To achieve this goal, he invests in an index of Russian stocks 1 mln rub. and every month postpones more 30 thousand. Assuming, that the real profitability of the Russian market will be about 8% per annum, then by the pension the investor's capital may be more than 64 RUB million! If only our hero could start investing earlier and start acting in this way. 11 years ago, in their 22 of the year, in theory, in retirement, he could own capital in the amount of 150 million. rub. adjusted for inflation. This confirms the rule., that the most valuable resource of the investor is time.
Next time we'll talk about the history of index funds and that, why sometimes passive investing works better than active investing.
If you have a portfolio of securities with a value of 3 RUB million, we recommend conducting an audit - it's free. You will receive a professional opinion from a personal broker, based on analytics from Argus Research and BCS Global Markets.
