Blog 3: The MOST important thing to understand in the world of finance! Part 2

Posting this third blog took a lot longer than expected. Although I had the structure in my head, I could not find enough free time to put it on paper. Fortunately, I am still within my once per week intention.

In my previous blog, I explained what compound interest is and why the concept is so powerful. Why did I do that?

Obviously, there are several reasons. Let’s sum the main ones up:

1. Being able to build-up a substantial amount of capital makes your live more comfortable (certainly on an older age). I use the word ‘comfortable’ deliberately and not ‘happiness’. The latter dependents on many more factors…

2. If you learn some basic investment skills based on compound interest it will help you accumulating wealth with limited effort

3. Even better. If you learn your children about compound interest and they can start using it on a relatively young age, they will benefit enormously from it

4. Still even better. You can apply compound interest fundamentals already for your children when they are still in diapers, giving them a head start

5. Understanding compound interest and what it can do for you, will give you much more insight into the optimal utilization of money (spending versus investing)

How can you use compound interest to your advantage?

Start thinking of products or services that people will always use or need.

Often products will be food related. Examples of services are for instance those provided by the hairdresser, dentist or undertaker. Very recurring and not so sensitive for disruption.

Now start looking for companies providing those products or services on the stock exchange. This is not very difficult. Often you will even be familiar with those companies. On the Dutch stock market, I found a good example:

Most of you will know this business (some even better than they like 😉). It ticks a lot of boxes.

• I believe people will continue consuming its products

• It has a strong brand and a long track record

• It pays out a yearly cash dividend, a good sign that the business is cash positive

Find between 5 and 10 of those type of companies and just start buying shares of them. Every month for an equal amount. That way you will buy through the cycle, i.e. high and low. If you receive dividend use that to buy more shares.

The results!

Assume that you invest €20 per month (€240 per year) from the day you were born until retirement at the age of 65.

Total investment in 65 years is €15,600 (65 x €240).

If you put this amount in a saving account at your local bank @ an average of 2% interest, you would have more than doubled it to €32,100. That is fantastic, right?

Not if you understand that a good and stable business should be able to provide an average yearly return of 6% to 8% and what this will do for you.

At the lower range your investment of €15,600 will have returned €182,900 and at the higher range even €478,800.

If you want no effort at all you can just buy a fund that follows the stock index, but I believe that with some effort you should be able to make a better selection (to make that 1% or 2% additional return) based on the simple ideas I put in this blog.

As a professional in the world of investing it is the goal to do slightly better. If you can realize an average yearly return of 10% you will even end up with almost €1,3 million. That is 83x the amount invested.

Hopefully I made my point clear and you will stop putting a monthly amount in your kids (or your own) savings account and start investing in good and reliable businesses (or in a fund that follows the stock index). You do not have to be rich to do this. Just do it well-balanced!

Next time I will try to relate this to crypto investing.

Thanks for reading and all the best,

@look4balance