Compound interest vs real world

[trajan]

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]

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]

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?

[TokyoBoglehead]

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?

Yes, in Japanese at least. Inflation will eat away at your money far far faster.

I received like 40 yen in interest this year from my Yucho account.

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

You"ll need to use US equivalents that track the same index.

Emaxis Slim All Country -> MSCI ACWI

iShares MSCI ACWI ETF (NYSE TICKER MSCI )- > MSCI ACWI

Of course the US is Dollar denominated and the Japanese one Yen. So that will cause some differences for certain. It's fine if you zoom out though.

[Tkydon]

https://www.youtube.com/playlist?list=P ... hWcjbdfWxT

[trajan]

https://www.youtube.com/playlist?list=P ... hWcjbdfWxT

That's... daunting.

[Tkydon]

The first couple of episodes deal with the concept of Risk when valuing securities.

US Treasuries are now yielding more than 3% in USD Terms, but there is the risk that the Exchange Rate would move against you and still leave you Net negative in JPY terms...

There are many different types of Risk, which must all be taken into consideration...
Inflation Risk
Country Risk
Political Risk
Exchange Rate Risk
Market Risk
Industry Risk
Sector Risk
Individual Company Risk
and so on

[TokyoBoglehead]

https://www.youtube.com/playlist?list=P ... hWcjbdfWxT

That's... daunting.

And completely unnecessary unless you plan to pick stocks.

Buy a low cost broad based index fund and sit back. Go global.

The market will increase in value over the medium to long term. If not we will all be farming beets to survive anyways .

[trajan]

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.

[TokyoBoglehead]

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.

With SBI you can invest monthly with an SMBC credit card and receive V-Points as.a bonus.

I do not bank with SMBC.

With my Gold card, I invest 5 万 monthly and get 500 V-Points. I can then reinvest these in my SBI account. Pretty sweet deal. I get paid to invest.