RetireJapan

trajan wrote: ↑Thu Oct 27, 2022 12:28 am It is not particularly difficult to understand how compound interest works and there are plenty of online calculators. For example:

https://www.thecalculatorsite.com/finan ... ulator.php

However, I find it particularly difficult to understand how actual investment works in the real world.

I will provide a simple example for the sake of making this query as clear as possible.

- Putting 1,000,000 yen per year for 15 years in a savings account amounts to 15,000,000 yen.

- Investing 1,000,000 yen per year for 15 years at 3% yearly interests amounts to ~20,000,000 yen.

- Investing 1,000,000 yen per year for 15 years at 5% yearly interests amounts to ~23,000,000 yen.

Clearly, this calculation is unfit for the real world because it does not account for risk.

My question is what that risk precisely is, for I am a moron and I cannot figure it out.

I understand that yearly interests can go up or down. The hard part to process is that the "principal" invested (in this example, the 15 million) is always at play, meaning, I could lose a significant part of it at any given year and end up with less than 15 million yen.

The issue here is not greed. A 3% is fine if that's what a bullet-proof investment yields. But there is no savings account or anything of that sort I am aware of. Of course, I am ignorant. Please tell me otherwise.

Having said that, how would this investment had done in the popular "Rakuten All Country Equity Index Fund" for the last 15 years?

Thank you all.

TokyoBoglehead wrote: ↑Thu Oct 27, 2022 1:22 am

trajan wrote: ↑Thu Oct 27, 2022 12:28 am It is not particularly difficult to understand how compound interest works and there are plenty of online calculators. For example:

https://www.thecalculatorsite.com/finan ... ulator.php

However, I find it particularly difficult to understand how actual investment works in the real world.

I will provide a simple example for the sake of making this query as clear as possible.

- Putting 1,000,000 yen per year for 15 years in a savings account amounts to 15,000,000 yen.

- Investing 1,000,000 yen per year for 15 years at 3% yearly interests amounts to ~20,000,000 yen.

- Investing 1,000,000 yen per year for 15 years at 5% yearly interests amounts to ~23,000,000 yen.

Clearly, this calculation is unfit for the real world because it does not account for risk.

My question is what that risk precisely is, for I am a moron and I cannot figure it out.

I understand that yearly interests can go up or down. The hard part to process is that the "principal" invested (in this example, the 15 million) is always at play, meaning, I could lose a significant part of it at any given year and end up with less than 15 million yen.

The issue here is not greed. A 3% is fine if that's what a bullet-proof investment yields. But there is no savings account or anything of that sort I am aware of. Of course, I am ignorant. Please tell me otherwise.

Having said that, how would this investment had done in the popular "Rakuten All Country Equity Index Fund" for the last 15 years?

Thank you all.

To answer your questions, first consider why do bank savings accounts pay interest?

Why? -> The bank borrows your money, and uses it to earn a profit.

If they are you paying you 1% interest a year, then they are surely making 1% + profit, right?

The safest investment for a bank is Sovereign debit, government bonds, and similar products. There is little risk here for the lender and the borrower (typically). Bank deposits are also often insured by governments up to a certain amount.

.....................

With stocks, you are expected to be compensated for the extra risk you are taking on. Will company X grow? Will company Y pay out dividends?

You rightly should expect more potential reward for this risk.

However, as you increase your investment horizon, and diversify your holdings this risk decreases. (As does the potential reward of betting everything on say, one stock hitting it big.)

If you want to backtest, I recommend this site -> https://www.portfoliovisualizer.com/backtest-portfolio

trajan wrote: ↑Thu Oct 27, 2022 1:51 am

TokyoBoglehead wrote: ↑Thu Oct 27, 2022 1:22 am

trajan wrote: ↑Thu Oct 27, 2022 12:28 am It is not particularly difficult to understand how compound interest works and there are plenty of online calculators. For example:

https://www.thecalculatorsite.com/finan ... ulator.php

However, I find it particularly difficult to understand how actual investment works in the real world.

I will provide a simple example for the sake of making this query as clear as possible.

- Putting 1,000,000 yen per year for 15 years in a savings account amounts to 15,000,000 yen.

- Investing 1,000,000 yen per year for 15 years at 3% yearly interests amounts to ~20,000,000 yen.

- Investing 1,000,000 yen per year for 15 years at 5% yearly interests amounts to ~23,000,000 yen.

Clearly, this calculation is unfit for the real world because it does not account for risk.

My question is what that risk precisely is, for I am a moron and I cannot figure it out.

I understand that yearly interests can go up or down. The hard part to process is that the "principal" invested (in this example, the 15 million) is always at play, meaning, I could lose a significant part of it at any given year and end up with less than 15 million yen.

The issue here is not greed. A 3% is fine if that's what a bullet-proof investment yields. But there is no savings account or anything of that sort I am aware of. Of course, I am ignorant. Please tell me otherwise.

Having said that, how would this investment had done in the popular "Rakuten All Country Equity Index Fund" for the last 15 years?

Thank you all.

To answer your questions, first consider why do bank savings accounts pay interest?

Why? -> The bank borrows your money, and uses it to earn a profit.

If they are you paying you 1% interest a year, then they are surely making 1% + profit, right?

The safest investment for a bank is Sovereign debit, government bonds, and similar products. There is little risk here for the lender and the borrower (typically). Bank deposits are also often insured by governments up to a certain amount.

.....................

With stocks, you are expected to be compensated for the extra risk you are taking on. Will company X grow? Will company Y pay out dividends?

You rightly should expect more potential reward for this risk.

However, as you increase your investment horizon, and diversify your holdings this risk decreases. (As does the potential reward of betting everything on say, one stock hitting it big.)

If you want to backtest, I recommend this site -> https://www.portfoliovisualizer.com/backtest-portfolio

Thank you for the quick reply and the backtest site. I will play with it and see what I can make of it.

Regarding what you call "safest", I gather you are dismissing them because the interest is simply too low. Correct?

Thank you for the quick reply and the backtest site. I will play with it and see what I can make of it.

Tkydon wrote: ↑Thu Oct 27, 2022 3:33 am https://www.youtube.com/playlist?list=P ... hWcjbdfWxT

trajan wrote: ↑Thu Oct 27, 2022 3:59 am

Tkydon wrote: ↑Thu Oct 27, 2022 3:33 am https://www.youtube.com/playlist?list=P ... hWcjbdfWxT

That's... daunting.

trajan wrote: ↑Thu Oct 27, 2022 5:50 am Thanks @Tkydon but it's so over my head.

I can see in your signature (@TokyoBoglehead) that you have "Monthly Tsumutate -SBI - Via SMBC GOLD NL - SBI V Global Equity Index Fund".

Is that SMBC related to Prestia? I ask because I have an account with them but have never seen anything about investment other than currency related options.