5 ms·

Compound interest. Simply starting early in some boring find/investment and not obsessing over daily stock prices will do wonders for one’s health and finances

tempsy 7y ago
I always hear this but the theory of compound interest has little to do with stock investing. Not all stocks pay dividends. Most actually do not. And betting on a general YoY rise in stock prices into retirement is not the same thing as compound interest.
- Moodles 7y ago
  Stocks don’t need to pay out dividends for compound growth. Your last sentence is basically: “betting on compound growth is not the same as compound growth”. Yes ok, but a little pedantic imo. Over hundred years of evidence suggests betting on a diversified portfolio of stocks is a good idea in the long term.
  - tempsy 7y ago
    It’s not being pedantic. When you talk about the theory of compound interest it’s essentially starting with $100, getting paid interest or a dividend, and then reinvesting that so now you have $102 that earns a dividend or interest and so on. Investing in 100 shares of company XYZ that does not pay a dividend, or investing in a company that does pay a dividend but isn’t being reinvested, is not compound interest in the classic sense at all.
    - Moodles 7y ago
      Roughly speaking, if a company doesn’t pay a dividend, it reinvests the profits in itself which compounds its own stock price. You get the benefits of compounding stock prices that way. I think we are arguing over semantics.
      - tempsy 7y ago
        It’s analogous, depending on the company, but it’s still a misnomer to use compound interest to describe stocks when by definition is only appropriate to describe a loan or deposit (e.g. principal and interest payment)
        deleted 7y ago
        [deleted]
    - PopeDotNinja 7y ago
      You're missing a key component of how dividends tend to work. If a stock it trading at $102 and they announce a $2 dividend, the stock almost immediately drops to $2. If you buy/reinvest that $2 back into the stock, effectively nothing has changed.
      - loco5niner 7y ago
        Correct! Except it drops BY $2 ;-)
- _se 7y ago
  Historically speaking, you're very wrong. There's no better place you could've put your money than the s&p.
  - tempsy 7y ago
    I’m saying a positive ROI is not the same thing as compound interest. An asset that rises in value like $SPY is not in of itself an example of compound interest.
    - awrence 7y ago
      This feels like a semantics back and forth. Call it compound growth then. It's the same concept. This applies to all yielding assets. You can call it divs / buybacks for stocks and interest for bonds, but it's the same thing / effect.
      - samatman 7y ago
        Not even vaguely. Compounded interest is reliable, even boring. You know exactly what you'll have at any moment in time. Your ten-year index returns are reasonably reliable, historically. But your 2007-2009 returns aren't your 2016-2018 returns, at all. They're different concepts and deserve to be conceptualized differently, especially in the modern era, where interest rates on Treasure are lower than inflation.
  - tunesmith 7y ago
    A few tidbits to balance in: On average, S&P performance over 40 years is very good. However, if you look at every possible 40-year period so far, some are really good and some are lousy. If you instead ask "What performance would I have gotten in 90% of those cases?" the performance is not as high. Performance over 30 years is naturally worse than over 40 years, and so on. Due to volatility, you generally score better (in terms of percentage of x-year periods) if you do 70/30 stocks/bonds rather than 100% in stocks. Meaning, you can leverage it to either aim for the same performance with less volatility, or same volatility with greater return. Finally, people tend to put more money in the market when times are good at stocks are high, and less when times are bad and stocks are low. This has a dragging effect on what performance a person can expect. For example, I keep pretty good records and have a list of every date/amount of each retirement contribution I've made. I'm able to simulate what my current balance would be if I have immediately put each sum into S&P (by using the adjusted close for that period). It's not as good as the reported S&P average over that period.
- sweeneyrod 7y ago
  But given that a company can choose to stop paying a dividend whenever they want, by your standard dividend-paying stocks also have nothing to do with compound interest.
- BeetleB 7y ago
  > Not all stocks pay dividends. Most actually do not. Yes, but the historical performance of, say, the S&P 500 has more to do with dividend reinvesting than the actual value of the shares appreciating. If they did not reinvest the dividends, the S&P 500 would not be as attractive as it is. It's still not compound interest, but it is compounding.
riffraff 7y ago
this is generally useful and true, but it was more so when boring and safe investments (e.g. government bonds) were paying significant interests. As of now, a 10y US treasury bill will pay less than 2%, and 2% compounded is still not much ("your $1000 saved today will become $1999 if you don't touch it for 35 years!"). Learning to save in general is probably the more fundamental information, imho. EDIT: obviously investing in stocks-based funds comes with extra risks, and extra profit. If anything learning that risk and profit are connected is an even more important insight.
- justaguyhere 7y ago
  There are places where you get 5-10% interests on fixed deposits (mostly Asian countries). At approx 7%, you can double your money in 10 years. At 10%, you can double in 7 years approx and so on. It all depends on where one is living, I suppose. I can't find anything in the US market though - bank interest rates are a joke, treasury/bond % is too low. Stock market is on fire, but most stocks are so expensive that it is out of reach for most Americans. I am not sure what other choices Americans have ...
  - Cephalopterus 7y ago
    You shouldn't be comparing nominal returns between markets, what you should be comparing is the inflation adjusted real returns. That's why even if Japanese banks offer nearly no interest the currency is deflating and as a result holder might end up with a net profit
mamcx 7y ago
Is this just a USA thing? I live in Colombia and wish to have something like that, but not know how judge if the packages given by banks are truly decent. For example, I look at one of the richest bank accounts balances of a company I work for and the savings account become a net loss after each year. The way to get some money is for people itself perform in a kind of lottery we call a "natillera" where people put together money and try to create some profits running events from it. This demoralize me a lot, because if with all that money in an account you lost anyway, what chance get the rest of us?
maerF0x0 7y ago
A requisite response to those who mention compound growth (interest) and the fallacy of it "never" ending: https://www.youtube.com/watch?v=kZA9Hnp3aV4 https://www.youtube.com/watch?v=kZA9Hnp3aV4 (Exponential Growth Arithmetic, Population and Energy, Dr. Albert A. Bartlett)

tempsy 7y ago

I always hear this but the theory of compound interest has little to do with stock investing. Not all stocks pay dividends. Most actually do not. And betting on a general YoY rise in stock prices into retirement is not the same thing as compound interest.

Moodles 7y ago
Stocks don’t need to pay out dividends for compound growth. Your last sentence is basically: “betting on compound growth is not the same as compound growth”. Yes ok, but a little pedantic imo. Over hundred years of evidence suggests betting on a diversified portfolio of stocks is a good idea in the long term.
- tempsy 7y ago
  It’s not being pedantic. When you talk about the theory of compound interest it’s essentially starting with $100, getting paid interest or a dividend, and then reinvesting that so now you have $102 that earns a dividend or interest and so on. Investing in 100 shares of company XYZ that does not pay a dividend, or investing in a company that does pay a dividend but isn’t being reinvested, is not compound interest in the classic sense at all.
  - Moodles 7y ago
    Roughly speaking, if a company doesn’t pay a dividend, it reinvests the profits in itself which compounds its own stock price. You get the benefits of compounding stock prices that way. I think we are arguing over semantics.
    - tempsy 7y ago
      It’s analogous, depending on the company, but it’s still a misnomer to use compound interest to describe stocks when by definition is only appropriate to describe a loan or deposit (e.g. principal and interest payment)
      - deleted 7y ago
        [deleted]
  - PopeDotNinja 7y ago
    You're missing a key component of how dividends tend to work. If a stock it trading at $102 and they announce a $2 dividend, the stock almost immediately drops to $2. If you buy/reinvest that $2 back into the stock, effectively nothing has changed.
    - loco5niner 7y ago
      Correct! Except it drops BY $2 ;-)
_se 7y ago
Historically speaking, you're very wrong. There's no better place you could've put your money than the s&p.
- tempsy 7y ago
  I’m saying a positive ROI is not the same thing as compound interest. An asset that rises in value like $SPY is not in of itself an example of compound interest.
  - awrence 7y ago
    This feels like a semantics back and forth. Call it compound growth then. It's the same concept. This applies to all yielding assets. You can call it divs / buybacks for stocks and interest for bonds, but it's the same thing / effect.
    - samatman 7y ago
      Not even vaguely. Compounded interest is reliable, even boring. You know exactly what you'll have at any moment in time. Your ten-year index returns are reasonably reliable, historically. But your 2007-2009 returns aren't your 2016-2018 returns, at all. They're different concepts and deserve to be conceptualized differently, especially in the modern era, where interest rates on Treasure are lower than inflation.
- tunesmith 7y ago
  A few tidbits to balance in: On average, S&P performance over 40 years is very good. However, if you look at every possible 40-year period so far, some are really good and some are lousy. If you instead ask "What performance would I have gotten in 90% of those cases?" the performance is not as high. Performance over 30 years is naturally worse than over 40 years, and so on. Due to volatility, you generally score better (in terms of percentage of x-year periods) if you do 70/30 stocks/bonds rather than 100% in stocks. Meaning, you can leverage it to either aim for the same performance with less volatility, or same volatility with greater return. Finally, people tend to put more money in the market when times are good at stocks are high, and less when times are bad and stocks are low. This has a dragging effect on what performance a person can expect. For example, I keep pretty good records and have a list of every date/amount of each retirement contribution I've made. I'm able to simulate what my current balance would be if I have immediately put each sum into S&P (by using the adjusted close for that period). It's not as good as the reported S&P average over that period.
sweeneyrod 7y ago
But given that a company can choose to stop paying a dividend whenever they want, by your standard dividend-paying stocks also have nothing to do with compound interest.
BeetleB 7y ago
> Not all stocks pay dividends. Most actually do not. Yes, but the historical performance of, say, the S&P 500 has more to do with dividend reinvesting than the actual value of the shares appreciating. If they did not reinvest the dividends, the S&P 500 would not be as attractive as it is. It's still not compound interest, but it is compounding.

riffraff 7y ago

this is generally useful and true, but it was more so when boring and safe investments (e.g. government bonds) were paying significant interests. As of now, a 10y US treasury bill will pay less than 2%, and 2% compounded is still not much ("your $1000 saved today will become $1999 if you don't touch it for 35 years!"). Learning to save in general is probably the more fundamental information, imho. EDIT: obviously investing in stocks-based funds comes with extra risks, and extra profit. If anything learning that risk and profit are connected is an even more important insight.

justaguyhere 7y ago
There are places where you get 5-10% interests on fixed deposits (mostly Asian countries). At approx 7%, you can double your money in 10 years. At 10%, you can double in 7 years approx and so on. It all depends on where one is living, I suppose. I can't find anything in the US market though - bank interest rates are a joke, treasury/bond % is too low. Stock market is on fire, but most stocks are so expensive that it is out of reach for most Americans. I am not sure what other choices Americans have ...
- Cephalopterus 7y ago
  You shouldn't be comparing nominal returns between markets, what you should be comparing is the inflation adjusted real returns. That's why even if Japanese banks offer nearly no interest the currency is deflating and as a result holder might end up with a net profit

mamcx 7y ago

Is this just a USA thing? I live in Colombia and wish to have something like that, but not know how judge if the packages given by banks are truly decent. For example, I look at one of the richest bank accounts balances of a company I work for and the savings account become a net loss after each year. The way to get some money is for people itself perform in a kind of lottery we call a "natillera" where people put together money and try to create some profits running events from it. This demoralize me a lot, because if with all that money in an account you lost anyway, what chance get the rest of us?

maerF0x0 7y ago

A requisite response to those who mention compound growth (interest) and the fallacy of it "never" ending: https://www.youtube.com/watch?v=kZA9Hnp3aV4 https://www.youtube.com/watch?v=kZA9Hnp3aV4 (Exponential Growth Arithmetic, Population and Energy, Dr. Albert A. Bartlett)