Compounding: Investing 101
Compounding: Investing 101
Meet the eighth wonder of the world.
Good evening fellow enthusiasts 👋,
Happy Wednesday, and welcome to the first official edition of ABD (a big discussion).
ABD will be a brief issue on a topic related to investing, finance, business, or politics—depending on whatever I found interesting that day.
So, without any further delay, let’s dive into it.
Meet the eighth wonder of the world
I recently watched the Toronto Maple Leafs play against the San Jose Sharks, and aside from the Leafs absolutely dominating the Sharks (7-1), I couldn’t help but notice an advertisement during intermission.
It was very captivating to me, and since it kept playing over and over again, it must have embedded itself into my brain. My brain doesn’t like forgetting things that interest me, so I thought I would give a breakdown of the ad.
(Pro tip: watch the ad before reading this issue for a better understanding.)
Here’s what I will be talking about today:
Why the ad stuck with me
What can we learn from the ad?
Why the ad stuck with me 🧠
For the most part, it was just curiosity; it was about investing, and I’m a sucker for anything related to investing since that topic interests me.
For the not-so-most part, it was a claim in the video that a 2% fee is going to end up losing you more than $400,000, which just seemed very interesting. I’ll double-check the claims later on in this issue, but first, you should know about compound interest.
After all…
“Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.” — Charlie Munger
Essentially, compound interest is your initial investment making money on the investment on the investment.
Most people understand compound interest from the lens of a bank account. For example, let’s say that one month the bank pays you $4,000 (4%) in interest for the $100,000 you have in the bank. Well, now the following month, since your balance is $104,000, you will make $4,040 in interest. Then $4,321.60, and so forth.
Your interest just paid you interest. This is called compound interest.
Now, let’s say you don’t touch a dime in your bank account, you don’t add any money to the account, you keep the same yield of 4%, and you wait 30 years.
After 30 years, your balance would be at $324,339.75. Even though it’s absolutely crazy to think about, it’s all the right math, no mistakes.
The sad part is that a bank does not pay you a 4% yield consistently. That would be bonkers, and everyone would open a savings account. No one does. Here in Canada, the highest-paying yield on a savings account from the five biggest banks is around 0.75% from CIBC. That is without including any bonus offers. That is the flat rate. Your $324,339.75 would have only been $125,127.18 in reality.
I watched this ad knowing about compound interest, and hopefully, now you can understand why it drew me in.
What can we learn from the ad? 🤔
If you’ve watched the ad, it’s clearly not about a savings account. The company that made the ad is called Questrade, which, by a quick Google search, is an investment company. This is where it starts to get juicy.
Last year, on April 4, 2023, I myself purchased my first-ever stock. Over the course of the next few months, I would buy some more stocks I found undervalued at the time, and I added a few ETFs.
I ended the year off 10.89% in the green.
I already mentioned how the 4% example I used was not in touch with reality, since a bank will not pay you 4%, but an annual yield of 10% is always in touch with reality when talking about investing.
Let’s do some math.
On $100,000 over the course of 30 years in a bank account at 4%, you would end up with $324,339.75. That’s if you don’t add any money, take out any money, and you let it sit for that timeframe.
Now, let’s compare that to my portfolio. I already showed how last year I made 10.89%, so what would that be if I made that consistently over the same period in the bank account example?
If I started with $100,000, I would have $2.22 million in my investment account 30 years from now.
This is not fake, and this is not an example. This is what I am currently making with my investments, and this is what they will look like in the timeframe of 30 years if I started with $100,000 (view the graph I made below).
I quadrupled the highest savings account yield available in Canada, and my investments still would have made $1.9 million more. Even if I only started with $20,000, I would still end up $100,000 richer than someone who kept their money in a savings account with a yield four times the average and a starting point $80,000 more than me.
This is the power of compound interest, and what we see in the advertisement is a graph showing this exact scenario. Instead, they didn’t use a return of 10.89%, but a return of 8%, which is the historical average of the stock market annually.
(Notice how the average annual stock market return is double a savings account four times the national Canadian average).
This is investing. This is why you invest. And this is why you should be investing. It’s not about getting rich easy, but instead about getting rich “slow.” This advertisement didn’t enlighten me on why I was investing, since I already knew why I was. It instead opened my eyes in a way and reminded me why I started.
For those of you who are already investing, take this issue as consolidation. For those of you who aren’t, I hope this issue gives you even a small reason to start investing.
PS: Make sure to claim your $25 signup bonus by opening a Wealthsimple account using the promo code LIAQ6A.
That’s it for today. Make sure to read the next issue of Weekly Brief that comes out on Friday, and I wish you all a great week ahead. 🚀🎊
*If this issue seemed short, don’t worry, because they will get longer over time as the topics get juicier!
— Jacob