I want to understand the stock market!
Question 1: “Why should I invest?” One answer to that question, admittedly, is “That’s too risky. I know people who have nothing right now. Am I badly informed, I have a savings account.”
So the first answer to educating yourself is to ask yourself: “Do I know what the Rule Of 72 is?” and “How does it affect me, anyway?”
What Is The Rule Of 72?
The Rule Of 72 goes back at least many hundreds of years. Luca Pacioli reference The Rule Of 72 in the 15th century, stating that to determine how long it takes your money to double is based on the interest rate it earns. {Luca didn’t explain the rule much, meaning it possibly goes back even further than that, but the principle still holds true today}.
{Here’s an example: start with any amount of money, let’s say 0.00 to be simple. You invest it at 10%. Using the simplest of math, you take 72 and divide it by 10, and you get the number 7.2, which means your money will double to 0.00 in 7.2 years}.
{If you have 0.00 and you invest in at 7.2%, you take 72 and divide it by 7.2, and you get the number 10, which means your money will double to 0.00 in 10 years.
The same exact principle is true if you start with 0.00 or 0,000.00. That’s all the harder it is}.
Do we concur? Well, not exactly. If you assume that in The Rule Of 72 interest compounds yearly you are happy, how would you feel if it compounds monthly or even daily. To get a good idea here you go, there are Financial calculators that are very accurate.
How will this affect me, anyway?
Let’s figure you really are thinking like our fictitious person at the beginning of this article, and you “know better” than to get into the stock market, so you just leave some money every month in a savings account. Don’t get comfortable with the idea that you’re better off than people who don’t save at all – you are, but is it enough?
Follow me if you will.
So you’re in savings account which, in today’s market, maybe pays you somewhere between 0.2% most are getting 3%, all of your assets and of course your mortgage. If you’re in the latter of those two groups and earning 3%, then we take 72 and divide it by 3, and we get….to have your money double in 24 years. Ouch! I think you could do much better.
If you’re in the former group and earning 0.2% yeah this would be great if you are looking to double your money in 3,600 years! Easy enough?
By the way, if you’re a retired person, and you do have some assets saved up, but the market makes you nervous and so you only buy 3% CD’s, you’re looking at that same 24 years for doubling, IF you don’t withdraw anything, and IF the inflation rate is zero. Even though that inflation rate is pretty close to the truth right now, it’s nowhere close to normal, since the average inflation rate in the United States is around 3% for the last 200 years. Truth is most of the time, a 3% return is no return at all.
What does this have to do with the stock market? Your involvement IS the answer to the first question. Get involved, but don’t take more risk than necessary, and hire a professional to help, and you just might avoid falling behind the curve and working a lot longer than you’d like to support yourself and your family.
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