The Magic of Compounding

There is one statement that has been attributed to Albert Einstein:

"Compound interest is the eighth wonder of the world".

Whether this is correctly quoted by the man himself is arguable, but what is correct is that the magic of compounding is essential for retirement planning.

Ask Warren Buffet, probably the greatest investor in this lifetime as demonstrated by his management of Berkshire Hathaway. He describes the power of compound interest as building a little snowball and rolling it down a very long hill. As the snowball rolls down the hill, it collects more and more snow until it becomes a huge snowball. At an annual shareholders’ meeting, Buffett gave this answer to question on how to make billions, “The trick is to have a very long hill, which means either starting very young or living… to be very old.”

Compounding, in its most basic terms, is just a repetitive process that can magnify gains in the long term. As what Warren has said, the longer the duration, the better.

Take for instance A and B who both decided to invest $500 per month for 8 years, with the same interest rate of 3% interest, not super high by today’s standard. A started investing at age 22 while B decided to “eat, drink and be happy” in his earlier years and start his investing journey at age 52. When they both reach 60, there is a stark difference. A would have accumulated over $131K while B would have just $54K! The only difference is the timing.

So, what would be a good way to start this journey

Identify the basic amount…perhaps start with $5K in a S&P500 low-cost fund
Add a recurring monthly investment of perhaps $500 to $1K
Continue for 10 years, 20 years or more...
See the magic happen!

Obviously, when we have more funds to invest (when we get promoted or salary increase), we can add more to the fund. Alternatively, when we have more knowledge, we go on a different path with the same principles but with Global funds, Energy, Finance companies, etc.

Time Management or is it really Project Management?

We have been told since young by others that in order to do something well, we need to have good time management. As one who leads projects for a living who knows a thing or two about this, I will say that time management is a fallacy. Purely speaking, time management (just like managing people) refers to managing time in which we control time, i.e. we can accelerate it (to make it go faster), slow it down, or to stop time. We can do this with a lot of things but we cannot manage time - it continues to chug along, whether we like it or not. If you were to ask me the time and my answer is, say 9:00am, that time is already gone because it is 9:01am when you continue with what you are doing. Time is like a freight train or a subway that we can only latch on to and hope we can do things within the allotted time. Ask the student who needs to submit the paper at 11:59pm Sunday night or the employee who need to submit the report Mon morning 9:00am. In truth, what ...

The Mental You - Reducing Stress part 2

Just like there are always 2 sides to each story (the good and the bad), we can tackle issues in 2 ways - either head on or perhaps we can do something opposite altogether. The previous post is primarily concerned on how to overcome stress by reducing it. Another way is to focus on something totally unrelated to stress. So, rather than looking at fixing the bad, we focus on the good such that there is little room for the bad. Let's work on this together... Positive Thinking What do you see if you turn on the news, or start looking at social media? More often than not, aside from the beautiful people and cute cats, the news is mostly gloom and doom. There are wars and rumors of wars, climate change due to global warming causing floods, and other disasters, earthquakes at various parts of the world. So, it's no uncommon for us to no longer see the world in rose-tinted glasses but glasses with murky lenses. And yet, to reduce stress, this is the one thing we must do - to think ...

Parenting

How did you do it? This question has been asked by many of my friends and colleagues when they found out about my children. We had initially thought that what we went through is typical. But as we talked to more and more people, it is only then we realized that the journey is not so common after all. Singapore has been ranked amongst the top countries in the world by PISA, short for the Program for International Student Assessment that is under the OECD umbrella. In some years, it is actually ranked number 1. In other words, to be able to get through the Singapore education system is difficult enough as it is. The Journey to College By the grace of God, both my kids did well in the system by being selected into the Gifted Education Program (GEP) - for the top 1% of students - and then getting into Raffles Institution (supposedly the number 1 school in Singapore), and achieving straight As in the Singapore-GCE Cambridge "A" levels, and then receiving offers from a few o...

Paving the Wei

Search This Blog