Education - Return on Investment 101

Let's simplify things and get back to basics. The investment is a simple process. The aim is to aggravate our seed capital to the highest possible level of each year. The reason that compounding is the goal of every investor has matured because compounding makes the wealth quickly.

If you have ever played with a calculator and recognized as compounding acts, it is known that the higher the compounder, the more distorted the returns. For example, a simple bank deposits, will give a return of say 5% a year. The majority of investors use a bank deposit as a reference point that can be used to compare the opportunity against this basic model. Every investment has a risk and make a bank deposit is the safest of all investments, it is guaranteed by the government.

For this reason it is used as a way to get the opportunity perspective potential investment. 5% is not very significant in terms of capitalization. The majority of investors use 5:10 intervals of time of the year. Allows you to watch two different compounding returns and notice the difference is compounder.

If you start with $ 100 and adds that the capital every year to 5% in 10 years you would have $ 162 at the end of 10 years. But if you double the pharmacist. If you were able to find other ways to invest your money than a bank deposit, but with a standard of reasonable risk, you could multiply that $ 100 for the 10% and in 10 years you will have $ 259 dollars. Notice the effect distorted?

With 5% of market capitalization was $ 62 dollars of added returns. With 10% or twice the value of capitalization, did not double your returns, you have done more. You made $ 159 dollars. You have done more than 2 ½ times more. Interest on interest money grows exponentially. But the real key is that more than 56%
You did compounding rate of 200% (10% versus 5%), but you made 256% returns
(159/62). A full 56% of the expected doubling of the compounder would you give.

The point of this is obvious. The higher the compounder is every year, the most amazing are your results. Many investors work with the equation of risk / reward. The goal is to return as high as you can every year, without actually losing your investment or make a negative return. About 30% to 50% is pushing the envelope and begins to enter the territory of very high-risk investments.

However, there is good reason for a small percentage of your portfolio should be used for high-risk investments and start-ups. When you play the odds, in other words you invest small pieces of money and expect to lose the small amount of money 6 of 10 times, the other 4 pan for astronomical profits. Imagine paying 20 cents for Microsoft stock at the beginning. You could have bought 10,000 shares for $ 2000 This type of risk-taking with a small amount of money is extraordinarily profitable if it is limited to only a small percentage of your entire sheet harbor ....