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We asked you to send in your experiences about the financial mistakes you made in 2007 and how you plan to make 2008 a financial success.
Here we present a strategy by Bengalooru reader Mahitosh Patankar, 25, working in an IT company, telling us how you can make money using the magic of power of compounding and by the virtue of patience.
Kaun? Kaise? Using the power of compounding, of course. I agree this is a cliche. Everyone knows the power of compounding and how things can grow in time. The point I am going to make here is not the power of compounding but how easy it is to utilise this power without any effort when you invest in stocks for the long term.
Initially I used to think like this: what's the use of dividend when the stock price appreciation is enough to make money and the dividend payout is paltry.
A look at the chart below will help you understand the real power of power of compounding. Now look at the chart below.
As the table shows you should begin with an initial investment of Rs 2 lakhs (Row 2). In the very first year (under column 1) your money will grow to Rs 2,50,000 (assumption: 25 per cent return in one year). It is not difficult in today's time to grow your investments in stocks by 25 per cent. The initial Rs 2 lakhs that you have invested will increase to Rs 23,28,306 at the end of tenth year (again assuming that you are able to grow your investments by 25 per cent each year for the next 9 years).
Similarly in the second year (Row 3) you start afresh with an investment of Rs 2,00,000 that at the end of tenth year will earn you Rs 18,62,645. Remember that the number of years for which your money will compound itself decreases as you invest your money afresh year after year.
At the beginning of the tenth year you will have only a year to help your money grow at 25 per cent. Hence the total you will have for this investment will be only Rs 2,50,000 (Row 12).
Now if you sum up amount at the end of tenth year, your investment strategy will have made you a crorepati (Rs 1,06,41,532 to be precise). That's the magic of compounding and investing your money with a long-term horizon.
This chart shows what will be the value of your investment if you keep investing 2 lakhs per year with expected return of 25 per cent.
However, you can increase the amount or return to achieve the goal faster.
Now to get Rs 2 lakhs is not difficult. What is difficult is to continuously getting high returns year on year.
Here comes the fun part... to get this kind of return you don't have to keep scratching your head; your long term investment will come to rescue since they will keep giving you good returns.
Now the googly; We have so many stocks and mutual funds which were invested long time back and are now giving 100-400 per cent returns including the dividend amount.
Let's say you invested in a stock for Rs 10 and after a few years it has appreciated to Rs 100 and has given dividend of 50 per cent every year.
For someone who is investing now will think 50 per cent dividend, that is Rs 5 on a share of face value Rs 10 but market price of Rs 100, is very less.
But someone who has invested long time back is getting 50 per cent return (Rs 5 each year for 10 years makes it Rs 50) on his investment every year (Remember that you have bought the stock when the market price was Rs 10). Appreciation in the stock value is just an added advantage you can say.
Quite amazing, isn't it? According to the chart above we just need 25 per cent return on our investment every year to become a crorepati. Here I have shown how your goal can be achieved automatically without having to worry too much.
So now imagine keeping your money invested for 15-20 or more years� and getting 25-50-100 per cent returns on your original investment. Add the power of compounding to that and you can see how easy it is to make huge money.
Let your money work to earn you more money� but then what will you do with so much money?
Of course, enjoy the beautiful things in this world god created for you.
Also read: 'How I make money by taking loans'
Disclaimer: This is a reader-driven feature. The views expressed by the readers are their own, and not that of Rediff.com. Rediff.com has not altered the material presented here and does not endorse it in any way.
Did you make any financial mistakes in 2007? What caused you to make these mistakes? How could you have avoided them? Would you like to inform people about such investment bloopers so that they make wiser investment decisions in 2008?
How are you planning investments in 2008 so that the year ends for you on a happy note?
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