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March 30, 2009


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I remember when I was in middle school we wrote a computer program that showed us the power of compound interest. THIS IS THE POWER OF INVESTING. Its how the rich in this country get richer. Imagine being able to post 10% returns each year by investing in stocks, currencies or commodities. You'd double your money in 7 years time.

At we teach people how to harness the power of compound interest through investing.

My wife and I are young and are extremely interested in harnessing the power of compound interest as soon as possible. Right now we are in the middle of a War on Debt, but as soon as we succeed we are going to start using the theories of compound interest like no other!

Actually the cool part of this is that it doesn't go to infinity.

This article made some crazy assumptions.

"Assume you deposited $1,000 in a one-year bank CD that paid simple 7% per year interest."

I never in my life came across a CD that pays 7%. If you know one, please enlight me.

Stop mis-guiding your readers with that magical & rosey 10% yearly return on investments. How about telling your reader the potential lost of 50% in just 5 months. This article just doesn't present all the facts.

This article has no moral in itself.

rw --

Maybe you should do some research. Found this after 10 seconds on Google:

CD rates were over 7% in 2000.

I assume, based on your comment, that you're less than nine years old.

I agree with rw. 10% yearly returns, every year for abt 47 years are very rare.

rw is right. The assumptions in this article are ridiculous in light of the carnage we've seen.

10% return on investments? A simple 7% cd? Lets be honest, the only funds who delivered these kinds of returns in the past DECADE were run by guys named Madoff and Stanford.

But in spite of that, in spite of where we've been, I think that going forward it might not be unreasonable to expect 10% returns on equity investments over a 10-20 year time-frame. The time to be bearish on the markets was at S&P 1500. At 800, I'm more agnostic. At 600 and lower, I'm a raging bull.

Think of it like this. At 600, a 10% rally in the S&P over the next ten years only takes us back to the old highs.

CD's? At one time, 20% yields (late 70's) were the norm. But since then, interest rates have been heading lower, to the point that in months we should be able to lock down a 30 year mortgage at 4% (where I think the Fed wants rates to go). That's insanely low if you think about it.

The point being, rates are -- in my estimation -- as low as we'll ever see them, and that the path of least resistance likely points to higher rates over the next decade, and thus (much) higher CD yields.

So while the assumptions in the article may seem silly and dated based on where we've come from, they appear more realistic (i.e., attainable) based on the current field position of the markets, and what I perceive to be generational lows on the interest rate front.

Of course, 10% interest consistently every year for 50-ish years is pretty unlikely. It's more likely to see several years of 10%, a few years flat, a few years negative, then some years back at 5%, and so on.

The general idea that starting early gives you an advantage is true. Even with some down years and some average years, over time your money does build up, and if you get started a couple decades early, in good years you'll be earning more in interest than you initially put in in principal.

But of course the right strategy is to do both what Jack did and what Jill did -- get started early, and then keep investing. Watch your expenses, watch your asset balance, and keep building your asset portfolio.

Compound interest truly works. However, later on you got to pay Uncle Sam from the capital gains.

The Unrelenting Power of Compound Interest article is to show a point not to tell you that there are CD's out there that will pay you 7%. Since the Great Market Crash of 1929 the stock market has AVERAGED a 10% return per year. It didn't say that you were guaranteed of getting that return every year. You may get 20% 1 year and 5% the next but it averages 10% a year. Why do some of these people start acting like what is said is what is guaranteed? It is just trying to show you how compound interest works and if you can't pick up on what the article is trying to tell you then you probably shouldn't be reading it.

"Since the Great Market Crash of 1929 the stock market has AVERAGED a 10% return per year."

People have been quoting this same statistic for years. Considering that the markets have lost 50% of their value in the past 18 months this statistic cannot possibly still be true. I'd actually love to see an analysis from some of the buy-and-hold index fund proponents about how index funds stack up after the big recent fall in valuation.


nice try. Use research that actually applies and spend a bit more than 10 seconds on a rebuttal.

Jumbo CD rates?????

you tell RW to do some research, then post a link to data on Jumbo CD's, which are commonly CD's with $100K - $1 million or more, yet you use $1000 in your post as the initial example. That applies!

And Jumbo CD's eclipsed 7% exactly one time in the past two decades.

As RW said, crazy assumptions.

I think a lot of posters are missing the point completely. The article is about compound interest. The number isn't the point, it's the idea that CI is interest on interest and over time can be very productive.

And I had a CD from my neighborhood credit union that paid 7% as late as 2000, and I renewed it for 5 years through 2005 at 6.5%. The original value of the CD nearly doubled from 18k to 34K between 1995 to 2005. Then I put the money in the Vanguard Wellington fund. I wish I would have left it at the credit union.

And if the earlier post today on the subject of inflation is correct, we'll see high rates like that again.

The reason the example is so egregious is that the doubling time is so short with a 10% ROI. Using the rule of 72, the doubling time is only about 7 years. So after 7 of these doubling time periods the $6000 grows pretty darn fast. $6K, 12K, 24K, 48K, 96K, 192K, $384K, $768K. The number of doubling periods is key as if you get enough of these then you really see the 'hockey stick' come out in the exponential curve.

Realistically, houses appreciate 1% above the inflation rate, CD's about the same and stocks maybe 2-3% over the inflation rate. Now a true rate of 3% net growth corresponds to a doubling time of 24 years (using the rule of 72). That means if you want to accumulate 7 doubling periods you will need 168 years to achieve this- not possible in a lifetime. As you say, there is no such thing as getting rich quick. So don't oversell compound interest.

Also this example forgot about a big, big, big factor. Taxable interest on gains- that effectively reduces the real gain by a factor of 1/3. It's even more punishing in a high inflation environment where you get taxed just to keep up with inflation!

C'mon people- we are all taught to think critically. Apply critical thinking to this example and find the hole in the argument.

Also don't forget, there is always a small risk that the USD could bust- in that case the 60 years of savings in CD's would be for naught, wouldn't it? Time to revise the model!


The fact is if I would have pulled all of my money out of the market in 1997 and stuck it in CDs at bank I would have a higher net worth today.

Bob --

Ok, so maybe I should have taken more than 10 seconds of research. But the comment was so off target that it got me riled.

Is anyone debating the main point -- that money invested at ANY rate -- for a long period of time is a better option of waiting and investing money at that same rate for a short period of time?

"Since the Great Market Crash of 1929 the stock market has AVERAGED a 10% return per year. "
Average return != compound annual return. If your stock goes up by 20% one year and goes down by 10% the next, you get average return of 10%, but real return of 0%.

One thing about simple interest. This is what corporate and municipal bonds do - they pay you simple interest twice as year as income. But... Nobody told you have to put this interest under the mattress. You can invest it in something else.

"Is anyone debating the main point -- that money invested at ANY rate -- for a long period of time is a better option of waiting and investing money at that same rate for a short period of time?"
This really depends on what the rate will be after this short period of time. A 10-year CD in 1983 locked at 13% was great. Unless you believe in 10-year deflation, I doubt it is a good idea today.

I read in so many books about how you should "assume your money grows 7% per year." Im in my early 20's and my money in my 401(k) and Roth IRA has gone down 50% since I began investing 2 years ago. Now the money is going going gone.

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