Last weekend I was at one of my relatives place. She has two young kids. One of them is around 19 years and the younger one might be around 14-15 years of age
I was very glad to notice that they had an interest in making investments at such a young age. I also loved the idea that their father was actually instilling in them a habit of trying to evaluate different avenues in investing. This means that in India the efforts of channels like ETNow and CNBC TV18 & the efforts of the mutual fund industry and stock exchanges like NSE are starting to bear fruit. If kids and parents start discussing financial products then the future is definitely bright for the Indian middle class.
When they came to know that I write a blog on achieving financial freedom, they thought of asking me for some recommendations on stocks and other investments, which I denied. I prefer not to give advice on any specific type of instruments or stocks, because a) I am not qualified and b) because everyone has a different risk appetite.
Since I like to look at just the basics and compounding and the rule of 72 are simple things that anyone can do at the back of an napkin, I just spent time with them on that.
Using the above I just explained to them without any use of even a calculator how wealthy he could grow.
If the younger son invests today Rs10000/- at the age of 15. India’s long term growth rate has been about 15% average. Even the indices therefore will grow at a long term average of 15%.
Therefore if he was to put this 10000/- in a Nifty ETF, it would also grow at an average of 15%. By the rule of 72 if he divides the number 72 by 15% then he will double the money in about 4.5 years. For simplicity let’s assume 5 years. which means every ten years it will grow 4 times. So his investment table, if he keeps invested with this 10000/- would look like below. Just staying invested without doing any hard work (incidentally staying invested could be the hardest thing) he can convert his Rs10000/- into Rs10million or (Rs 1 crore)
The second column is if he looks out for investments which can lead him to compound at close to 25%. then you see the magic. The amount converts to Rs1 billion (100 crores). Look at what happens between the ages of 45 and 65. At 45 he would have Rs 10 million and at 65 Rs 1 Billion. Even Warren Buffet’s wealth if you Google at age 65 and now at age 85, he is one of the richest men on earth just because of this phenomenon.
Obviously getting 25% on a consistent basis is not going to be easy, over a long period of time. But the key is going to be about staying invested. I hope the young guy can.
If you have any young guy you know, just show him this table of what his 10000 today can do for him over 30-40 years.
Till next time….