Hair Today, Gone Tomorrow…
Einstein said “He who understands compound interest, earns it. While he who doesn't, pays it.”
That was back before they burned all the abacuses for calculators, and the old school maths for compound interest was something only an Einstein could figure out.
Today it’s easy to reckon how much your money can grow if you invest it well and leave it alone.
Just multiply your investment by the interest rate you’re getting each year, and then add it to the total, like this:
The folks who “earn” compound interest look at money this way.
And it’s the pessimistic investors who are moving their money out of stocks (and even US Treasuries and bond funds), and into cash and deposit accounts at a time when interest rates are historically low - like they’ve been for over 10 years.
Now, bank deposits might folks anywhere from 0.1% to 1.0% on their money (if they’re lucky).
In fact, the reality of cash deposit interest rates reminds me of a joke that asks, “Who will be the first to pick up a stray £20 note dropped in the street: An optimistic economist, a pessimistic economist, or Santa Claus?”
The answer is the pessimistic economist. The other two are fairy tales, just like a 10% deposit account.
Now, do you want to know how long it will take you to double your money at 1.0% or 0.1% interest?
All you do is divide your annual return after any tax into the number 72.
So, if your interest rate is 10% (like in the example above) it’ll take you 7.2 years to double your money. Not bad!
But if it’s 1% it’ll take you 72 years. That’s right, 72 years!
Worse still, if your rate is 0.1%, it’ll take you 720 years to double your money…
At that rate even Santa Claus hasn’t double his money yet.
Yep, deposit accounts seem like a bit of a head scratcher to me.
And maybe that’s why Einstein’s hair always looked such a mess.
If you found this note interesting and you want to chat about it, do get in touch.
Alan Steel, Chairman, Alan Steel Asset Management