Sunday, August 13, 2006

Return in 4% ? Or 6% ?

Now days, our fixed deposit (FD) rate only around 4% and lot of opinion out there said that we should look for higher return in order to overcome the inflation.

I always told my friends we should take more risk to get higher return to protect our asset not depreciate cause by inflation. Normally I told them the potential return will be 6% yearly even though some of the historical data show that 10% return per year is possible. So now come the question, is it worth to take the risk just try to get additional that little 2% extra return?

If investor just park the money in the FD and enjoy the 4% yearly return, they won’t loss any single cents because the fixed deposit is consider risk free and save. Compare with other investment tools which might cause them to lose money, and potential give the 6% return. The different is only that little 2%!! So the argue out whether worth to take the risk in order to earn that little 2% extra…

I don’t know how to measure the value of that 2% to them and should they take the risk or not. What I can do is analyze the impact of that 2% to their saving and let them to make their own decision.

Assume you have 100,000, how long you need to double up your saving with current return rate which is 4% yearly?

From the rule of 72, we can know that investor need 18 years to double up his saving from 100,000 to 200,000 with the 4% return. And you only take 12 years to do the same thing if the return rate is 6%. Because of that little 2% extra every year, you eventually save up 6 years!!! And what if the average return is more than 6%? How about 7%? With this additional 3% extra every years, you almost save up 8 years to get the same result compare with others which need 18 years.

Wonderful, isn’t it? So please don’t try to ignore the additional little 2-3 %, they might help you with save up your several years in future. So at this stage, most people can decide on their own whether worth to take the risk to earn that extra little %.

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