Compounding is a process of generating
earnings on your assest’s reinvested earnings.
Compounding work on two basic aspects of
investment: Reinvestment of earnings and time,
the longer you keep the money to compound,
the higher wealth you generate. Albert Einstien
said once that the most powerful force of the
universe is compound interest. He knew the
power of compounding and clearly understood
the need of disciplined investment at an early
age so as to reap the benefits of compounding
on a high amount of wealth generated as a
result of being an early bird in the investment
horizon.
The power of compounding can be easily
understood by the following example:
The total number of grains of rice on the first half
of the chessboard is 1 + 2 + 4 + 8 + 16 + 32 + 64 +
128 + 256 + 512 + 1024 … + 2,147,483,648, for a
total of exactly 232 − 1 = 4,294,967,295 grains of
rice, or about 100,000 kg of rice, with the mass
of one grain of rice being roughly 25 mg.
The total number of grains of rice on the second
half of the chessboard is 232 + 233 + 234 … + 263,
for a total of 264 − 232 grains of rice. This is
about 460 billion tones, or 6 times the entire
weight of the Earth Biomass.
On the 64th square of the chessboard there
would be exactly 263 =
9,223,372,036,854,775,808 grains of rice. In
total, on the entire chessboard there would be
exactly 264 − 1 = 18,446,744,073,709,551,615
grains of rice.
This example illustrates perfectly the power of
compounding which is often said as the eighth
wonder of the world and Albert Einstein too
said once that the most powerful force in the
whole universe is compound interest. To reap
its benefits maximum, one should start early in
his life by cutting the unnecessary expenses and
utilizing the saving in investments so as to
generate maximum wealth out of his limited
income.
The above chessboard had to be filled by rice
grains. The condition is that on the first square,
one rice grain is to be placed and on the second
double of first and on the third double of the
second and so on.
When you start your investment program of say
IRS 1,000 a month; initially the growth in
compounding is extremely slow. However, once
it hits a certain period of time, the growth
explodes exponentially! The trouble with most
people is that when they see the slow growth
during the first few years, they lose patience
and abandon their investment plan.
BE AN EARLY BIRD
There is no truth to statements like ‘I am too
young to start saving’. For example, if you want
to have a corpus of Rs. 1 crore by 45, you would
need to invest only Rs.1.6 lakh per year if you
start at the age of 25 (assuming 10% returns
p.a.). But if you start at the age of 35 you will
need to invest Rs.5.7 lakh per year to achieve
your objective. If you start saving and investing
early, it will prove to give a strong foundation to
your financial goals later in your life.
LIVE IN REALITY
We all know that being greedy is the most bad
habit. A large number of investors invest in
stock with expectation of doubling up their
investment. If you want to double your money,
either buy a lottery or go to a casino (but be
prepared to lose everything). Stock market is
not gambling. The market is ultimately a
reflection of economic growth. As such one
needs to align one’s expectation of returns in
line with the expected GDP growth.
THINK,
BUY
AND
COMPARE
Keep an eye on the relevant benchmark indices
and compare your portfolio with their
performance with realistic expectations.
Expecting unreasonable returns will surely cause
disappointment, leading to excessive risk-taking.
BE REGULAR
Be patient. Use the time in your hands and do
not rely merely on luck and timing of your
investments You may be lucky once or twice but
history has not produced a single investor who
has made money regularly by timing the
market. Don’t panic when the market is
dropping and don’t become greedy when prices
are rising.
HOLD ON FOR RESULTS
Be a marathon runner The markets have seen
lots of ups and downs, but history shows that
over time the value of a well-diversified
portfolio will increase. Stay invested for longer
periods. It will keep you from making common
mistakes such as timing the market, picking bad
stocks, speculating on stocks that are worthless,
investing on borrowed money, trying to make a
killing in some fad-of-the-day stock, etc. The
reason most people don't get rich with stocks is
that they don’t stay in long enough.
DON’T CHURN OFF INVESTMENTS
It only increases costs Don’t buy stocks. Buy
businesses and that too after due research. And
since businesses generally don’t change
fortunes overnight, there is no need to get
in/out frequently as and when some short-term
events play out in the market. Too-frequent
trading cuts into the investment returns more
than anything else. Remember that the only
person who makes money in regular churning is
your broker.
DIVERSIFY YOUR PORTFOLIO
Each investment class is important build a
portfolio that is diversified among different
types of investments. Because different sectors
of the market show different patterns, asset
allocation tends to reduce the risk of huge
losses and improves the chances of stable
returns. Lack of a well-diversified portfolio,
would leave you vulnerable to fluctuations of a
particular investment. However, remember not
to over-diversify and own too many investment
products – more so if the corpus is small –
resulting in higher fees relative to the corpus
size.
For Assistance kindly contact:
MR. KAMAL MEHTA
SANGAM INVESTMENTS
29, DDA Market, Swasthya Vihar, Vikas Marg, Delhi-110092
Mob.- 93112-56696, Tel: 011-43015689, 011-22454272
Email: [email protected]