Among the many similarities between New York and Mumbai is the fact that both are island cities. Manhattan is one of the islands in the city of New York.
The ‘most powerful force in the universe’ works for those investing regularly
MUMBAI: Among the many similarities between New York and Mumbai is the fact that both are island cities. Manhattan is one of the islands in the city of New York. The story goes that the Indians of Manhattan, in 1626, sold Manhattan to a group of immigrants for $24 in beads and trinkets, a deal they have often been ridiculed for. But, as Peter Lynch and John Rothschild point out in their 1989 book One up on Wall Street, they seem to have got a better deal than the people who bought the island.
Assuming that the Indians were able to convert the beads and trinkets into cash, the $24 compounded at 8% interest would have amounted to $30 trillion in 1989, when the book was written. While at the same point of time, as per the tax records, the entire real estate of Manhattan was worth only $28.1 billion.
This demonstrates the power of compounding, which essentially means reinvestment of the earnings from a particular asset rather than spending it.
Clearly, the sooner an individual starts investing, the greater the time his money will get to compound and grow.
Say Rajesh and Rakesh are brothers, some 10 years apart in age. Both start investing at the same time — Rajesh is 35 and Rakesh is 25. Both plan to invest Rs70,000 per annum till their retirement, at the age of 60. Assuming that they are able to manage an 8% rate of return per annum, at retirement Rajesh would have accumulated Rs55,96,809, while Rakesh would have amassed Rs1,30,97,150, almost 134% more.
Not for nothing did Albert Einstein once say, “The most powerful force in the universe is compound interest.”
Compounding works really well with regular investing. Also, it is important not to touch the corpus being compounded, for withdrawals would understandably eat into the returns.
The rate of return is important, too. In the Manhattan example, assuming the rate of return was 6% instead of 8%, the Indians would have ended up with only $34.1 billion, which is small change in comparison to $30 trillion.
k_vivek@dnaindia.net
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
)
){kind=small}
){kind=small}
)
)
)
)
)
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}