For a long time I have been dealing with the equity investment – in the 1980s playful and not always very successful as a student, then as a doctoral candidate and young management consultant rather not and from the mid-1990s increasingly professional. It took a decade for my system to really fit and mature. I want to shorten this path for you. But I can not spare you all that. The great André Kostolany spoke of the fact that the money earned on the stock market was nothing more than compensation for pain: “First comes the pain, then the money.”
Not all of you will be able to apply the system and stick to it. There are people who were not born to invest in capital markets. Some lack the mind, some the character requirements. Something smart, education and interest in economics (albeit less than you may think), diligence and above All serenity, self-confidence, and calm are necessary. But if you bring those conditions, there is no reason why you settle for less than 8 to 10% in the long term with a very limited workload.
A warning at the beginning: I admit that I am a stock fan. The bulk of my capital is invested in stocks. Shares of good companies are productive and non-inflationary assets. You can check for yourself whether or not my method succeeds, using a fund managed by my method.
Make a Rich Plan – Build a Fortune With Small Amounts
On the basis of two examples, I would like to show you specifically which capital generation is possible with relatively small monthly savings over the years. For almost everyone, if you behave disciplined in his spending, it may be possible to spend 50 or 100 euros per month for the accumulation of wealth.
In our first example, we are assuming a 50-euro savings plan and yield assumptions of 10 and 13% respectively, which is the return our funds have achieved over the last three years since its reissue.
In this example, we can see which capital gains are possible even with small amounts that are put on the high ground once a month. Significantly, the compounding effect is noticeable: After 40 years, with 13% average return and a deposit of 24,000 euros at the end of a fortune would have accumulated over half a million euros. At 10% yield and a maturity of 40 years, it would still be almost 280,000 euros, which would be a solid starting point for a sizeable family home.
With a monthly savings of 100 euros and an assumed return of 13% and a 40-year maturity, you can expect total assets of fabulous 1.3 million euros. But do 13% return sound richly? I must again point out that, for example, between its launch on 15 March 2017 and 15 March 2019, the PI Global Value Funds achieved a return of 13.7% despite the financial crisis.
The Compound Interest Effect as a Return Driver
The table shows the steps in which this fortune of 1.3 million euros has accumulated over the years. Nevertheless, it is almost unbelievable that you can build such a large capital from 100 Euro monthly savings rate. The secret behind it was already known in ancient India. According to legend, there was a king called Shihram there in the 3rd or 4th century, who through hardship and nepotism brought misery to his country (you see, little has changed in the past centuries).
One thing is clear: the longer you save and thus receive interest for every year, the more your assets grow. And the higher the annual interest rate, the stronger the asset growth per year. Let’s assume that you put the 1,000 euros from the example above, not ten years, but 40 years. Then your assets would have grown to 45,260 euros in the end.
If you invest 1,000 euros at an annual interest rate of 13.7, your capital will be 170,000 euros after 40 years.
The Cost-Average Effect as a Savings Turbo
Let’s get closer to the cost-averaging effect with a simple example from everyday life. Suppose you refuel your car every time for 30 euros. Logically, you will then receive at a price of 1.50 € gasoline, 20 liters. If the gasoline prices fall to 1.40 euros per liter, you will receive 21.42 liters of gasoline for your 30 euros at the next gas station visit. On the other hand, if the fuel price climbs to 1.60 euros, you only get 18.75 liters for 30 euros. For three refueling you spent 90 euros and got as a total value of 60.17 liters of gasoline. On average, you paid for one liter of 1.49 euros.
As you can see, if you always pay the same amount, you compensate for price fluctuations at the pump. What’s more, let’s say you only fueled once for 90 euros at 1.50 euros per liter, and your car consumes five liters per 100 kilometers. Then you would have come with the one-time tank filling 1,200 kilometers. When refueling three times at € 30 each, the tank fillings would have sufficed for 1,203 kilometers. Although this is a minimal difference, it does increase the longer you go with the “advice bucket” and the higher the gasoline price fluctuations.
In principle, the cost-averaging effect works the same way – you only pay a certain average price per fund share in the long term, as long as fund prices fluctuate up and down.
The longer a savings plan pays into a fund and the higher the price volatility, the greater the benefit of the cost-averaging effect over a one-off investment. Although it is often argued that the benefits of regular fund savings relative to a one-time investment in the long term perspective. However, this does not apply if the fund prices rise in the long term – with fluctuations. As the example has shown, fund savers have more shares at the end of the savings period than in the one-off investment. And if on end of the term of the fund price is higher than at the beginning, which reinforces the advantage of a savings plan.
The Triangle of Fortune Construction
Imagine Mrs. Hardy working in the parental crafts business grew up. She looks a bit gray-eyed and still maintains the old virtues of economy and diligence. At the age of 16, she received 1,000 euros from her parents. From the age of 16 to 25, she saves € 83.30 per month or € 1,000 per year, from the ages of 26 to 35 € 150 per month or € 1,800 per year and from 36 to 59 years of age € 200 Euro per month or 2,400 Euro per year. From 60, it will not save you anymore (although that’s unlikely, because whoever made it her habit will keep that habit). The assets are invested at the average stock market return of 10%.
Mr. Karriere, on the other hand, is a high-flyer: Even as a young adult, he has his car. The account is balanced. In his opinion, he does not have to save, because he will later earn a lot of money. Of course, he studies and subsequently joins as a management trainee at a major corporation. The cars are bigger, the women are more beautiful, and of course, a befitting apartment has to be. Mr. Karriere is not financially reckless, he does not plunge into debt. But he wants to live “befitting”. And “befitting” is always on the limit of what he currently has. At 50, he thinks that it might not be bad to do something for private retirement provision. After all, 50,000 euros are in his account. He now wants to set aside 2,000 euros a year every month until the age of 59.
How will the race between rabbit and hedgehog go? You guessed it already: Mrs. Harting wins by far. At 65, she has a deposit worth 1.72 million euros, Mr. Karriere over one of 0.91 million euros. Since Mrs. Harting was always economical and modest, she can now live up to her needs like a princess. Their assets are determined by three factors, the disposable income or capital, the return and the investment period. I call this connection to the triangle of asset accumulation. Time is the powerful ally of Mrs. Harting. Thanks to the tenfold saving in the last ten years. I just want to outline the basics of asset accumulation here.
From Nothing, Comes Nothing
If you want to build wealth, you need wealth that you can multiply. From nothing, comes nothing. You have to save. And you have to invest your capital yielding and secure. You can not get around this iron truth. I know investors who have tried to build their fortunes with risky trading strategies. An orthodontist wanted to get advice from me in quick stock market transactions. He was apparently under-utilized intellectually by his practice, and in the meantime – and more frequently every day – went to his PCB screen to check his depot and trades. In the meantime, such traders achieve some impressive results. At some point, everything will be gone. And in between, they trembled and lost a lot of nerves. Wealth building is a long-distance run. For this, you need the right mental conditioning.
Only if you get used to saving, spending less than you are taking, laying aside assets and continually increasing them will your fortune be preserved. It is not for nothing that only a few lottery millionaires manage to sustain their sudden prosperity. Mostly everything is gone after a short time.
Yields: The Miracle of Compound Interest
Imagine putting a grain of rice on the first box of a chess board. To the next square two, then four … and so on. Already on the 15th field, you would need to stack 16,384 grains of rice, on the 30th field would already be a billion grains! But we already know this story.
If you want to earn money with stocks, your investment period is crucial. At 1,000 euros annual savings and 10% return, not much happens in the first ten years. In the second year, for example, the savings amount of 1,000 euros and 100 euros increase in value, in the second year it is 210 euros increase in value. Then your assets grow faster and faster. As early as the seventh year, the increase in the value of your custody account has caught up with your savings of € 1,000 a year, in the eleventh year you have already raised € 2,000 in value, in the 16th year, 3,000. Your assets increase faster and faster if you manage to reach the 10% average.