The Basic Rules of Good Investing:

Rule 1: Don’t lose the sodding stuff

Rule 2: Refer to Rule 1

Rule 3: Use the Power of Compounding and the Rule of 72

It has been alleged that Albert Einstein stated that the compounding of interest was the most powerful force in the universe, apparently saying, “compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it”.

I do hope that he actually said that, but I suspect the man who as a theoretical physicist, developed the theory of relativity, probably would have found far greater powers in the universe rather than the comparatively mundane strength of the compounding of interest.

First though, let me define what I mean. When you earn interest or income on your savings and investments, that income will then earn further money and thus this amount is compounded onto the original sum.

This is normally used when looking at interest rates and trying to see how much money you may need in the future. Essentially, the higher the rates, the greater the return and the faster your money will eventually double. With interest rates at the moment effectively at zero and the power of compounding thus also close to zero, all is surprisingly not lost. For those willing to take a reasonable risk and a longer-term view, your money will provide you with a better yield by way of dividends on shares and coupons on bonds. 

Currently the yield of the FTSE100 index is roughly 4.1%, down from the longer-term return that we used to see of around 7%. However, this is not only better than the average deposit rate which is tiny (around 1% or more for regular or fixed periods), but it is also ahead of the current rate of inflation of 1.8%.

Obviously, the power of compounding when we had 7% returns was very attractive with you potentially seeing your money double every decade. Now though, with central bank rates at close to zero, or even negative in some cases, as well as company dividends under pressure, the yield values have come down a lot. But even at 4% this is still a real return.

Measurement

How do we measure what this can give us? By the ‘Rule of 72’. This is a simple way of establishing how long it will take to double your money. Simply divide into 72 your expected return and that will give you a rough estimate of the number of years needed. Thus 72 divided by 4.1% equals 17.5- and so £1,000 invested with this yield will become £2,000 in 17 and a half years.

Exciting? Hardly, but investing is a long-term concept, not a get rich quick scheme- that’s called betting… Sadly of course the fall in yields have meant the time to double has got longer, but for longer term financial family planning, such numbers are vital to tell you how much you are going to need for retirement, university fees and all your family’s future plans, including across the generations.

And finally… an Australian man accused of breaking into the wrong house has been found not guilty. Is this interesting news? Not really - until you find out why.

It would appear that a man called Leroy was cleared in a New South Wales court, of charges stemming from an incident last July where he was one of two men hired to carry out a stranger’s sexual fantasy of being tied up while clad in his underpants.

The case began after a man went on Facebook looking for someone willing to tie him up and then rub a broom handle around his underwear. “He was willing to pay $5000 if it was ‘really good’”, the Judge noted. A police officer testified that the man who hired Leroy had a “history and proclivity for engaging the services of people.”.

However, on the day the fantasy was to take place, Leroy and his partner showed up at the wrong house on the client’s street. The mistaken home’s occupant, who was on his way to use the bathroom, heard some noise and assumed it was a friend who came by each day to make coffee.

The victim yelled out, “Bugger off, it’s too early” but turned on his night light after hearing someone ask if he was the name of the man waiting for the kinky roleplay. The victim then saw two men carrying machetes standing next to his bed.

After the victim spoke his own name, Leroy and his colleague realised their error and started to leave. According to court documents, one said, “Sorry mate” whilst the other shook the victim’s hand and said, “Bye.”. Only in Australia!

They then drove to the correct address while the man they left behind contacted the police. Police eventually showed up, found the machetes in the car, and charged Leroy with entering a home intending to intimidate while armed with an offensive weapon.

During the trial, Leroy’s attorney successfully argued that the whole mishap, arose from “a commercial agreement to tie up and stroke a semi-naked man in his underpants with a broom.”. So far, in my obviously comparatively dull life I have never had such a commercial agreement- even though I am the proud owner of both an excellent broom and some pristine underpants.

Have a good week,

Justin Urquhart Stewart

Image source: thegraphicsfairy.com