

Non-intuitive Examples of Compounding Returns - jonxu
http://blog.futureadvisor.com/42555581

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WildUtah
Of course, nobody can reliably get 5.04% after tax and after inflation
compounding returns. (And nobody was able to over the long term in the
Twentieth Century in passive investments.) If you put your money in the stock
market over the past decade, for example, your return would be zero. And this
is one of the best times to be cashing out. Most of the last decade would have
produced negative returns.

Less risky investments like government bonds typically return less than 1%
over inflation. If you intend to save for retirement and hope to benefit from
compounding, you should be prepared to depend on 1% or less returns. One
percent returns will double your money in seventy-two years.

If you want to retire on more than Social Security, you should be prepared to
save every penny you'd like to spend. Compound investment returns have always
been unreliable and the development of modern finance may have eliminated
those returns forever by shifting all gains to banking executives.

Social Security is doing much better by comparison. Or you could get yourself
a government pension; those are insanely generous.

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ceslami
The point of the article is sound nonetheless: it is better to save early and
consistently.

This simple lesson alone could help many young people avoid financial issues
later in life.

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PaulHoule
No, the "compound interest" meme is one of the most dangerous ideas that's
going. Fundamentally, exponential growth destroys itself.

My model for economic progress is that there are two variables: the ability
for a civilization to solve problems and the ability for a civilization to
create problems. The benefits of growth are more immediately visible than the
drawbacks, and because they differentially accrue to certain people, those
people gain political power that is used to suppress the political response
that would solve the problems created by growth. As a result, problems
eventually grow faster than solutions.

When the ability of a civilization to create problems exceeds the ability to
solve problems, we get an economic crisis such as the Great Depression, the
stagflation of the 1970's or the situation that we're working through now. One
way or another, the system needs a decade or so of low performance in order to
slow down and sort out the problems that growth has created.

These crises seem to come every 40 years or so, so you're certain to have one,
maybe even two, in the course of a career and subsequent retirement. And it
just takes the aftermath of one to destroy your savings and possibly your
career.

And, as the previous commenter says, if Wall Street has really turned into a
system that captures all economic gains for a few people at the top, all
you're doing is making them rich when you put money in a 401k or IRA.
Personally, if I was President, the first thing I'd do is dismantle the 401k
and IRA systems and let people withdraw all the money they have in them.

I'm convinced that tax-deferred savings have created a 'lost generation' of
small businesses. It used to be people stacked up money in a bank and had it
available when they wanted to start a business. If all of your savings are in
a tax-deferred savings plan, you deprive yourself of that option.

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bugsy
There are lots of articles like this. They seldom discuss the effects of
inflation or properly plot things out on a logarithmic scale.

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omh
I agree about the effects of inflation, but why should things be plotted on a
logarithmic scale?

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rstonge
If you have constant return (e.g. 5%) this will show up as a linear growth
function on a log scale. It will be exponential on a normal scale, which over
time gets very steep. Using a log scale allows you to compare the growth rates
of different investments in a consistent way.

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jasonkester
I give this same advice a lot, and it's always telling to watch people's
reaction. Human nature is all about defending what you're currently doing,
against all evidence that there's a better way.

So, yeah, it's impossible to get 5%? Are you sure about that? Over a 40-50
year period? You'd have to look pretty hard at old stock charts to find a spot
where you could get overall returns that low.

And yes, inflation exists. It's probably still a good idea to save money for
retirement though.

And yes, you're young and don't have as much money to spend. But you also are
coming off a lifestyle where you shared a room with six guys and ate Costco
ramen every meal for 4 years. As soon as anybody starts giving you money, it's
money you didn't have before, so you absolutely can find a way to save it.

It's a lousy $1,000 per month. Figure out a way to stuff it into the market,
and despite all your rationalizations, the 50 year old version of you will
thank the 22 year old you.

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Two9A
Yeah, I've tried the whole stock market thing twice now. Put $1,000 in as a
tracker against the market index, expected a decent return; of course, I put
it in on Sep 10, 2001.

Never got that money back.

Thought I'd try again a couple of years ago, so I bought shares in Lloyds
Group. On the eve of Lehman going south.

Never got that money back, either. I think I'll stick to 3% savings accounts,
thanks.

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mhb
Where's a 3% savings account?

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streety
From the mention of Lloyds I'll assume that Two9A is in the UK. The best
instant access savings I know about is 2.9% from the post office [1] with
better rates available for 1 year bonds or longer [2].

[1]
[http://www.postoffice.co.uk/portal/po/content1?catId=1930023...](http://www.postoffice.co.uk/portal/po/content1?catId=19300232&mediaId=126000768)
[2] <http://www.lovemoney.com/savings/term-bond-accounts.aspx>

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nwomack
While this graph is indeed accurate for a static income, for many people the
income will increase over the years (on top of the inflation) which will cause
difference to be a little less dramatic.

Regardless, save as much as you can as early as you can...

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clistctrl
This is so great in theory, I've ran the calculations over, and over again.
However I feel like the question marks are never filled in.

1.) Put 1k a month in savings 2.) do ??? 3.) get > 3% compound interest 4.)
enjoy a debt free lifestyle

where do i get > 3% return!

