Investment Journal

In my last post about the power of compound interest, I said that learning its power will make us realize that we should start saving now, or if not now, at least as soon as we can. I also gave you an example about the difference between simple and compound interest. And that, compound interest can give you higher return by reinvesting your earned interest to earn more interest. In this post, I would like to give you another two short examples that will show you why we should start saving now.

If you are serious about saving or investing your money, you should understand compound interest. But if you think you're not yet ready to enter the investment world, and you think that you still have to wait 3 or 5 more years before you start saving money, then I think you're the one who really needs to understand the power of compound interest. Learning its importance and power may make you realize that you should start saving money NOW.

Q: What is compound interest?

A: It is simply an interest earning interest. Sounds simple? Yeah, but it is really powerful.

Q: How?

A: Let me give you an example:

Let Say you and your friend each has P100,000 to invest. Your friend chooses an account yielding simple interest at 5 percent. This means that each year his money is increased by P5,000, 5 percent of the principal investment P100,000. After year one, he has P105,000; after year two, P110,000; after year three, P115,000; and so on.

You, on the other hand, put your P100,000 in an account that returns 5 percent compound interest. This means that you get interest not only on your original P100,000, but on the interest that is added to it as well. At the end of year one, you will also have P105,000. In year two, you earn another 5 percent, but now it's 5 percent of P105,000, not of P100,000. So instead of getting P5,000 you get P5,250, bringing your total investment to P110,250. The third year, you get P5,513 The fourth year you get P5,788. Why does the interest keep on growing? Because you reinvest the interest you get every year, and that what makes your money grow faster. After 20 years, your friend's total investment will be P200,000 and your total investment will be P265,329.77. In this example, we only use 5% interest rate. What if we use 10% instead of 5% interest rate? After 20 years, your friend's total investment will be P300,000 and your total will be P672,749.99!

The basic guideline in investing is the country's inflation rate. All your savings for the long term, time deposits and other investments must produce rates that are higher than inflation. Your earnings rate should be 2 to 4 percent above inflation rate. So, if the inflation rate is 6%, your earnings rate should be 8 to 10%. Otherwise, you will lose a great deal of money especially if you invest for the long term. The longer the term, the higher the risk that at some point inflation will rise dramatically and reduce the value of your money. The money you save will not be enough to buy the same goods you are able to buy today. For example, you put 1,000,000 pesos in time deposit for one year and the bank's interest rate is 3% net per annum. If after one year inflation rate shoots up to 5%, your money will still lose 2% in value. Imagine how much you will lose if you will keep on doing this for 10 years.

I will be preparing an easy to understand examples for stocks, bonds, mutual funds and options. I will post it immediately when i finish it. For now, let me remind you again why we should invest.

So why should we invest?

If you don't want to work for money all your life then you should learn how to invest. Investing makes your hard-earned money work for you. Putting all of your money in the bank is not the only option. There are different types of investment instruments that you can use to maximize the earning potential of your money. If you're only planning to save for the short-term and think you're going to need the money in six months or less and you're saving it for emerngency fund then the bank might be suitable for you. But if you're planning to save for the long term, saving in a bank might not be a good idea. Why? Because bank's annual return rate(3%) is not enough to beat the inflation. In mutual fund, its possible to earn 10-30% annual return on your investment. Stocks, currency trading, futures and options can give you more than 30% or even 100-300%. But of course, there will be some risk included, but did anybody ever become successful in the world of investing without taking any risk?


For some people, investing is risky but other people think investing is risky only if you don't know what you're doing. Many also believe that to get higher return means you have to take on more risk. As the best-selling author Robert Kiyosaki said: "There are three types of investors in the world. They are : People who do not invest at all, people who invest not to lose and the people who invest to win." He said that those people who do not invest at all expect their family, the company they work for or their government to take care of them once their working days are over. People who invest not to lose invest in what they think are safe investments and these people have the saver's mentality when it comes to investing. The third type of investor who invest to win are willing to study more, want more control and invest for higher returns.

There is another strategy to make money with stocks and this is called short selling. If you sell short, it means you're expecting a decline in value of the stock so you can make money. Here how it works: To sell short, you borrow shares from your broker, then sell those shares and keep the money. Then you wait, expecting the price of the stock to drop. If it drops, you buy the shares at the lower price and return them to your broker.

For example, you borrow 100 shares to your broker and the current value is $10/share. Then you sell the 100 shares at $10/share and you get $1000. Then you wait, when the price drops to $7.50/share, you buy back the shares at $7.50 a share, give them to your broker and then keep the $2.50/share difference as profit. But if the price moves up to let's say $12.50/share and your broker needs their shares back, you have to buy back the shares at $12.50 so you can give them to your broker. A loss of $2.50 per share. Short selling is a strategy used by well experienced investors when they believe that stock prices will go down.

Here's how investors make money with stocks. One way is through capital appreciation, or making a profit by buying stock at a low price and selling it at a higher price. Wise and successful investors always follow this simple rule: "BUY LOW AND SELL HIGH".

For example: if you buy 1000 shares of Mcdonald's at $50/share(total investment of $50,000)and after three months the price moves up to $75/share and you sell it(total of $75,000), you have earned a capital gain of $25/share or $25,000. It's a 50% profit!

On the other hand, if you buy 1000 shares of Mcdonald's at $50/share(total investment of $50,000) and if the share price moves against you and you sell it for $25/share(total of $25,000), you have lost $25/share or $25,000. It's a 50% loss!

Common stocks or sometimes known as ordinary shares is the most typical way to invest in a corporation. The shares are issued initially by the corporation and sold to individuals, mutual funds, Banks and other financial institutions. Investing in common stocks or ordinary shares offer no guarantees but in the U.S, in other countries and here in the Philippines, stocks have produced better returns than other invesments. It is also possible to lose an entire invesment if you're not careful in choosing stocks. Common shareholder may make money through capital appreciation and dividends.

When a company wants to raise a capital for their business, they sell stocks, which are also known as shares. By selling shares they can sell part of the company to many part-owners or shareholders. Stocks or shares are pieces of the corporate pie. When you buy stocks or shares, you own a slice of the company, a fraction of the decision-making power, and a fraction of the profits, which the company may issue as dividends.

There are two different types of shares: common/ordinary shares and preferred shares. Common shareholder in a company is entitled to share in its profits in the form of dividends. There is no certainty that a company will make profits thus no certainty that there will be a dividend. However, the shareholder can also hope to make a capital gain from the shares by an increase in the share price. The share price will fluctuate from day to day according to company's progress and general economic conditions. Preferred shareholder on the other hand, has the right to a fixed dividend and this right takes precedence over the right of common shareholder. Preffered shareholder will also get the first chance to get some of the money they have put in if the company goes out of business.

If you don't want to work for money all your life then you should learn how to invest. Investing makes your hard-earned money work for you. Putting all of your money in the bank is not the only option. There are different types of investment instruments that you can use to maximize the earning potential of your money. If you're only planning to save for the short-term and think you're going to need the money in six months or less and you're saving it for emerngency fund then the bank might be suitable for you. But if you're planning to save for the long term, saving in a bank might not be a good idea. Why? Because bank's annual return rate(3%) is not enough to beat the inflation. In mutual fund, its possible to earn 10-30% annual return on your investment. Stocks, currency trading, futures and options can give you more than 30% or even 100-300%. But of course, there will be some risk included, but did anybody ever become successful in the world of investing without taking any risk?

For some people, investing is risky but other people think investing is risky only if you don't know what you're doing. Many also believe that to get higher return means you have to take on more risk. As the best-selling author Robert Kiyosaki said: "There are three types of investors in the world. They are : People who do not invest at all, people who invest not to lose and the people who invest to win." He said that those people who do not invest at all expect their family, the company they work for or their government to take care of them once their working days are over. People who invest not to lose invest in what they think are safe investments and these people have the saver's mentality when it comes to investing. The third type of investor who invest to win are willing to study more, want more control and invest for higher returns.

There are a lot of people who want to learn how to invest, who want to understand stocks, bonds, currency trading, futures and options, real estate and mutual funds. I made this blog to give you the basic of these investment instruments and how they work.