What you lack is not 1 million yuan, but deep thinking about compound interest!
how can I earn 1 million yuan? For ordinary people, the only answer is to compound interest, which is a very simple math problem.
if you have a principal of 1, yuan, realize 1 million yuan, and the annual return on investment is 4%, it will take 2 years, 5% is 17 years, and 1% is doubled, so it will take 1 years.
where I is the rate of return, p is the principal, and n is the period, we analyze it from three angles: the rate of return, the principal and the period.
The formula is very simple. The higher your rate of return, the shorter the time to realize 1 million yuan. Behind the rate of return is your investment ability, and the rate of return is directly proportional to your ability.
There is a fallacy here. Many people say that it is very high to keep compound interest above 3% a year. Actually, it is not. This 3% is for institutions with large or even tens of billions of funds, and the rate of return on small funds can be higher, on the grounds that it is more flexible and can make big advances and quick exits, but large funds cannot be realized.
that is, the size of income is inversely proportional to the size of funds (careful people can also find that the speed and stability of income are also inversely proportional).
just like Buffett, managing these tens of billions of dollars (with a wealth of $6.8 billion in 216), the annual rate of return of 2% and 3% is already extremely high.
there is another problem, that is, when the amount of your capital is larger, say, 5 million yuan, it will be much more difficult to manage your investment. The reason is very simple. For example, if you fancy a stock, it will triple in the next year, but the daily turnover is only 5 million yuan, so it will take you a long time to open a position, and it will be difficult to buy it even if you want.
By the same token, with less personal funds, the rate of return can be much higher than Buffett's (Buffett's average annual rate of return is 21.97%). When you have only a few hundred thousand dollars, it is not impossible to earn even several times a year with the same investment ability, which is very flexible. The reason is that there are many stocks that rise several times a year in the stock market. This is actually the idea of many novices, but not for professionals.
if we change the initial capital from 1, to 1 million, the time to realize 1 million can be greatly shortened. Take 1% income as an example, it only takes seven years, which is three years shorter than the previous 1, principal.
As long as the annual rate of return is 6%, you can still achieve 1 million yuan after 1 years, which means that increasing the principal can reduce the requirement of investment ability.
investing 1 million yuan in the stock market is not easy for ordinary young people. How to solve it? Let's think further.
I believe that every retail investor basically has a stable job. After a few years of graduation, he earns more than 1, yuan a year, saving 1, yuan to invest in the stock market (assuming the principal is 1, yuan). Remember that it is an additional 1, yuan a year. Let's look at the results in the following table:
Taking 1% per year as an example, the time to realize 1 million yuan can be shortened to nine years. If the 1-year cycle remains unchanged and the investment is increased, the rate of return can be reduced to 9%.
In fact, everyone's salary will increase with age. Let's assume that the principal invested each year is increased to 2,, so the period of compound interest can be shortened again.
this strategy is somewhat similar to the fixed investment strategy of the fund.
Therefore, in order to achieve the goal of compound interest, besides the rate of return, it is equally important to have a steady increase in income. Speaking of this, you will find that people who quit their jobs in the bull market are very stupid.
period n, the relationship between them has been explained in the above rate of return I and principal p.
if the principal is 1, yuan and 2, yuan is withdrawn every year, what is the effect?
then even if you achieve an annual rate of return of nearly 2%, withdrawing 2, yuan every year will have no compound interest effect at all. When the yield is greater than 2%, the annual withdrawal of money will also greatly lengthen the time of 1 million.
as you can often see, in fact, in a bull market, everyone is making money, and then many people will withdraw money from their accounts, which is fatal. First of all, making money in a bull market does not mean that your investment ability has improved (in fact, in a bull market, the data shows that most retail investors underperform the broader market), and the money you earn is likely to be sent back in a bear market.
It is worth noting that all the above assumptions are compound interest on the premise of obtaining positive returns.
to say something that is very negative but correct is that most of us can't get compound interest. In reality, most people lose money in the stock market, that is, negative gains. How can we get compound interest? The so-called, 7 losses, 2 draws and 1 profit.
If you are a strong learner, like to think and have great patience in doing things, in fact, you may succeed in any industry, and the stock market is just one of them.
After analysis, compound interest is not a simple number on the surface, nor is it a compound interest formula:
Only by understanding the profound truth behind the compound interest formula can compound interest be used by me.
because of the same principal of 1, yuan, the difference between 5% and 1% is twice the rate of return (investment ability). After ten years, that is the difference between 5 million yuan and 1 million yuan!
In fact, compound interest exists not only in financial management, but also in all aspects of life.