Have you ever heard of the term compound interest? Compound interest means that interest also bears interest. Understanding this theory can leave overwhelming performance in the long run. It is a very famous story that that genius physicist Einstein who published general relativity described “the most powerful force in the universe is compound interest.” Well, how effective is the asset management method that uses this compound interest?
Difference between compound interest and simple interest
A simple interest rate is a form of operating the earned interest without reinvesting it.
For example, suppose that one million yen is operated for 10 years with an annual interest rate of 7%. Under this condition, the interest rate earned in one year is 70,000 yen and the 10 year interest rate can be earned, so 70,000 yen × 10 (yearly) will earn 700,000 yen.
Compound interest is the conversion of earned interest rates into investments again.
For example, when operating under the same conditions as above, 100 × 1.07 (interest rate) ^ 10 (years) will be 1,196,151 yen. If you deduct the principal, you will earn 967,151 yen.
As interest rates are also added to interest rates, better performance can be left.
You may wish to have an image of a snowman.
We will introduce how to use compound interest management.
Shares are said to have a growth rate of about 7% in the long run in one study.
A financial product that can reliably enjoy this growth potential is said to be a low cost index fund. We introduce the following typical products.
・ Tawara no load
・ EMAXIS Slim
· Rakuten · Vanguard · Fund
~ ETF ~
Vanguard Total World Index (VT)
SPDR S & P 500 ETF (SPY)
Considering the expected return in the long run, it increases with compound interest. You may not feel the compounding effect so much as you invest daily.
Unlike fund investment, it is investment in high dividend stocks that can directly feel the effect of compound interest.
Although rare in Japanese stocks, there are many stocks exceeding 5% in overseas stocks. If you have a 7% dividend, you can double the dividend by simply re-investing for 10 years without additional investment. However, this is an assumption that no tax is incurred. The weak point of this strategy is that it is not a very effective strategy in countries where taxes are set high.
High dividend share example
P & G
Johnson & Johnson
AT & T
While there are taxing weaknesses, looking at long-term data, dividend stocks tend to outperform undistributed stocks.
You can use compound interest even with FX.
Do you know the word swap? A swap is a profit derived from the interest rate differential that occurs when you buy a high currency in a low currency currency.
Of course, buying a cheap country currency with a higher country currency results in a negative interest rate, which results in an adverse compounding effect.
The currencies with high interest rates include South African rand, Turkish lira and Australian dollar.
Please note that high interest rates = inflation can also be considered.
If you are compounding in a high interest rate currency, click on FX Online 365.
There are many easy-to-read charts, so it is very easy to trade.