Category Archives: Financial Planning

Best Investment Advice – Mark Cuban

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“You can’t buy health and you can’t buy love.” Warren Buffett

“The best investment you can make is paying off your credit cards, paying off whatever debt you have.” Mark Cuban

Cuban lived for years on the budget of what he referred to as “a broke college student”, driving lousy cars, eating lousy food and saving, saving, saving. He believed that overspending can be an unnecessary cause of stress, and he advocates for living like a student if that’s all you can truly afford. “Your biggest enemies are your bills,” Cuban wrote. “The more you owe, the more you stress. The more you stress over bills, the more difficult it is to focus on your goals. The cheaper you can live, the greater your options.”

A forward-thinking investor and notorious taker of calculated risks, he built his wealth slowly over time and he derived as much pleasure out of saving as he did spending.

Here is top investing advice from Mark Cuban to builde wealth and achieve financial freedom:

  • Pay Off Debt, Then Invest – Paying off debt before you invest delivers the best returns for your money (capital). “The best investment you can make is paying off your credit cards, paying off whatever debt you have. If you have a student loan with a 7% interest rate, if you pay off that loan, you’re making 7%, that’s your immediate return, which is a lot safer than picking a stock, or trying to pick real estate, or whatever it may be,” Cuban said.
  • Never Invest To Get Out of Trouble – Just like you should never gamble if you absolutely have to win, the same rules apply to investing as a remedy for financial trouble. “If you are buying because you need the price to go up and solve a financial hole you are in, that is the EXACT WRONG time to trade,” Cuban commented. “And we all have to respect people who choose to sell because they need to. Bills don’t care what the market does. Get right and come back later.”
  • Don’t Invest In the Stock Market – Cuban disagrees with investors who think capitalism’s greatest wealth-generation machine is the stock market. “Put it in the bank. The idiots that tell you to put your money in the market because eventually it will go up need to tell you that because they are trying to sell you something. The stock market is probably the worst investment vehicle out there. If you won’t put your money in the bank, NEVER put your money in something where you don’t have an information advantage. Why invest your money in something because a broker told you to? If the broker had a clue, he/she wouldn’t be a broker, they would be on a beach somewhere.”
  • But If You Invest in the Stock Market, Buy an Index Fund – Avoid picking your own stocks or buying into expensive mutual funds — buy an index fund. “For those investors not too knowledgeable about markets, the best bet is a cheap S&P 500 fund,” according to Cuban.
  • Buy a Stock You Believe In and Hold on for Dear Life – Ignore short term volatility and market gyrations. “When I buy a stock, I make sure I know why I[‘m] buying it. Then I HODL until … I learn that something has changed,” using text-slang acronym for “hold on for dear life.”
  • Take Risks — But Play It Safe 90% of the Time – Without risk, there can be no reward, and the bigger the risk, the bigger the potential payout. Cuban suggests that investors to go for broke and swing for the fences — but only with a sliver of their investments. “If you’re a true adventurer and you really want to throw the hail Mary, you might take 10% and put it in Bitcoin or Ethereum, but if you do that, you’ve got to pretend you’ve already lost your money,” Cuban commented. “It’s like collecting art, it’s like collecting baseball cards, it’s like collecting shoes. It’s a flyer, but I’d limit it to 10%.”
  • If One of Those Risks Is Crypto, Stick With the Big Boys – If you’re considering jumping on the cryptocurrency bandwagon, you’d be wise to place your bets on the biggest names in the game because Cuban sees way too many similarities to 1999 for comfort. “Watching the cryptos trade, it’s exactly like the internet stock bubble. exactly. I think Bitcoin, Ethereum, a few others will be analogous to those that were built during the dot-com era, survived the bubble bursting and thrived, like AMZN, EBay, and Priceline. Many won’t,” commented Cuban
  • If You Don’t Understand an Investment, Walk Away –  Investing fundamentals dictates against investing in things you don’t understand. “If you don’t fully understand the risks of an investment you are contemplating, it’s okay to do nothing,” Cuban wrote. “No. 1 rule of investing: When you don’t know what to do, do nothing.” Always invest in what you know.
  • Knowledge Is the Best Investment – The best way to avoid investing in something you don’t understand is to understand whatever you’re invested in. “At MicroSolutions it, “knowledge advantage”. gave me a huge advantage. A guy with little computer background could compete with far more experienced guys just because I put in the time to learn all I could. I read every book and magazine I could. Heck, three bucks for a magazine, 20 bucks for a book. One good idea that led to a customer or solution paid for itself many times over.”

You must be able to earn, save, and manage your spending, then you can start investing and building wealth.

Cuban was influenced by a book called “Cashing in on the American Dream: How to Retire by the Age of 35.”“The whole premise of the book [Cashing in on the American Dream] was if you could save up to $1 million and live like a student, you could retire” Cuban said. “But you would have to have the discipline of saving and how you spent your money once you got there. I did things like have five roommates and live off of macaroni and cheese and really was very, very frugal. I had the worst possible car.”

  1. https://www.gobankingrates.com/money/wealth/millionaire-money-rules/
  2. https://www.gobankingrates.com/investing/strategy/mark-cubans-top-investing-advice

Patience is the Key to 10X Investing

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“The stock market is a device to transfer money from the impatient to the patient.”  Warren Buffett

Patience and successful investing are necessary natural partners. Investing is a long-term prospect, the benefits of which typically come after many years. Patience, too, is a behavior where the benefits are mostly long-term. To be patient is to endure some short-term sacrifice or difficulty for a future reward. Patience is an important investment skill which we need to develop more fully and learning it could help you reach your financial goals.

Patience involves staying calm in situations where you lack control. Being a patient investor might not be easy, but there are tools to help you overcome impatience. Here are a few strategies you can use to cultivate patience and clarity of thought in your investing decisions.

  • Have a plan and think long term. Set long-term financial goals and keep them front of mind during volatile times. A written financial plan is a great idea. Long-term thinking helps you mentally separate your investing journey from your long-term financial destination. Keeping a long-term perspective will give you the psychological fortitude you need to grow your portfolio over the long term.
  • Understand that market volatility is normal. Market volatility is a normal part of life. It might still be unpleasant in the moment, but recognizing that you’ll encounter volatile markets will help you mentally prepare for corrections or other downturns.
  • Look for fear or fundamentals. Consider whether a recent stock decline reflects investor fear or actual negative fundamentals. If markets are driven more by fear, you may not need to worry too much about it: Fear-based corrections often turn around quickly. Even if fundamentals have declined, markets may be pricing in a future far worse than reality. In either situation, be patient and stick to your investment strategy.
  • Remember, time is on your side. Take solace in the long history of capital markets. Corrections are temporary and usually brief, and even bear markets eventually end. Historically, markets go up far more often and by a much greater margin than they go down. Owning stocks for the long term is one of the best ways to profit from economic progress, innovation and compound growth.

Time and patience are two of the most potent factors in investing because it brings the magic of something Albert Einstein once called the 8th wonder of the world- Compounding. It’s not easy, but hopefully these practices can help you focus on the long term and take comfort in stocks’ exceptional performance history.

Its difficult to be patient

Your brain makes it hard to be patient. Human beings were designed to react to threats, either real or perceived. Stressful situations trigger a physiological response in people. This is called the “fight-or-flight” response — either attack or run away, whatever helps alleviate the threat.

The problem is, your mind doesn’t recognize the difference between true physical danger and psychological triggers, like a market crash. Being patient is difficult because it means overcoming these natural instincts. Turbulent financial markets can trigger the response causing real-world impacts you’ll need patience to overcome.

During pandemic-driven bear market, your brain perceives a threat to your financial well-being. Even though stock market volatility isn’t a physical threat, the fight-or-flight response kicks in, emotion takes over, and your brain starts telling you to do something. Your investment portfolio is perceived as being harmed and your metabolically influenced to take action.

With investing, action too often translates into selling something because selling feels like you’re shielding your portfolio from further harm. But selling at the wrong time — like in the middle of a major downturn — is one of the biggest investment mistakes you can make.

If you can find a way to invest inexpensively in the market and stay in the market, you can start to build your net worth. Success in investing requires patience.

“In the end, how your investments behave is much less important than how you behave.” Benjamin Graham

You need patience when what you are invested in is performing poorly—and you need it when what you don’t own is performing well.

one of the most valuable traits an investor can have is patience. If you are a patient investor and decide on great businesses, there is virtually no scenario where you will not make money.

Investing your money in great companies over time will grow into a fortune. Switching in and out of investments cost investors significant returns over time.

“Waiting helps you as an investor and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.”  Charlie Munger

When it comes to investing, staying invested is quite often the most prudent and smartest approach for long-term investors. While there will always be market volatility and corrections, the key to successful investing is to stay focused on your goals.

References:

  1. https://www.entrepreneur.com/video/342261
  2. https://www.etmoney.com/blog/time-and-patience-two-key-virtues-to-become-successful-in-investing/
  3. https://www.thestreet.com/thestreet-fisher-investments-investor-opportunity/patience-the-most-underused-investing-skill

Believe in the Power of Compounding

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“Compounding is the eighth wonder of the world.” Albert Einstein

It is said that Albert Einstein once noted that the most powerful force in the universe is the principle of compounding. In simple terms, compound interest means that you begin to earn interest on the interest you receive, which multiplies your money at an accelerating rate. This is one significant reason for the success of many top investors.

Believe in the power of compounding

The key to successful investing is patience to search and wait for great companies that are selling for half or less than what they were worth (intrinsic value), and to hold the investment for the forever. The task is to try to buy a dollar of value for a fifty cents price, and to hold the investment for the long term.

  • Compound interest is the interest you earn on interest.
  • Compounding allows exponential growth for your principal.
  • Compounding interest can be good or bad depending on whether you are a saver or a borrower.
  • Think of stocks as a small piece of a business
  • Think of Investment fluctuations, volatility, are a benefit to a patient investor, rather than a curse.
  • Focus your attention on businesses where you think you understand the competitive advantages
  • The more people respond to short term events allow patient and value investors to make a lot of money.
  • Buy stocks when things are cheap. It’s important to control your emotions.

The key is that if you spend less than you earn, you put something away, and that little something can become more and more and eventually what you want to do is you want to be your own boss.” Mohnish Prbrai

Four important factors that determine how your money will compound:

  1. The profit you earn on your investment.
  2. The length of time you can leave your money to compound. The longer your money remains uninterrupted, the bigger your fortune can grow.
  3. The tax rate and the timing of the tax you have to pay to the government. You will earn far more money if you do not have to pay taxes at all or if the taxes are deferred.
  4. The risk you are willing to take with your money. Risk will determine the return potential, and ultimately determine whether compounding is a realistic expectation.

Rule of 72

The Rule of 72 is a great way to estimate how your investment will grow over time. If you know the interest rate, the Rule of 72 can tell you approximately how long it will take for your investment to double in value. Simply divide the number 72 by your investment’s expected rate of return (interest rate).

“The first rule of compounding: Never interrupt it unnecessarily. The elementary mathematics of compound interest is one of the most important models there is on earth.” Warren Buffett

The power of compounding is truly visible with billionaire investor Warren Buffett, the Oracle of Omaha. He first became a billionaire at the age of 56 in 1986. Today, his net worth is over $100 billion at the age of 90-plus. And that’s after he donated tens of billions of stock to charity. His wealth is due to compounding, over 99% of the billionaire’s net worth was built after the age of 56.

When you understand the time value of money, you’ll see that compounding and patience are the ingredients for wealth. Compounding is the first step towards long-term wealth creation.

References:

  1. https://www.thebalance.com/the-power-of-compound-interest-358054
  2. https://www.valuewalk.com/2020/07/power-compounding-getting-rich/

Taper Trantrum

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The Federal Reserve is discussing tapering, or slowing down the loose monetary policiy of bond purchases (quantitative easing).

The Federal Reserve has started dropping hints it’s going to begin tapering the quantitative easing that has been going on since March 2020 in response to the COVID-19 pandemic and subsequent economic shutdown.

Tapering is the process when the Federal Reserve reduces Quantitative Easing (QE) and begins scaling back their asset purchase program.  By gradually backing off or ending their asset purcase program by the middle of 2021, they would avoid disrupting financial markets.

The taper tantrum refers to the reaction of financial markets to the Fed’s announcement in 2013 that it might begin to scale back the pace of its asset purchases. The taper tantrum was an indicator that markets had become far too dependent on the Fed’s stimulus for their financial well-being and were addicted to its easy money / loose monetary policy.

Reducing bond purchases could provide more flexibility for the Fed to raise interest reates if inflation stays high within the economy and unemployment continues to fall.

No one know for sure how the market will response when the Fed slows Quantatative Easing. The fear of Wall Street is that the Fed could begin tapering much faster than had previously been expected.

References:

  1. https://seekingalpha.com/article/4435971-welcome-to-the-taper-tantrum-of-2021-and-buckle-up

Greater Financial Transparency of Chinese Stocks

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“The problem is, there’s all sorts of incentives to raise money on public markets in China, and there’s no penalty for fraud. So why should you not commit fraud in order to raise more money?” Anne Stevenson-Yang, Research Director at J Capital Research

Gary Gensler, Chairman of the U.S. Security and Exchange Commission (SEC), wants greater transparency of Chinese stocks listed on U.S. exchanges. He wants the risks of investing in Chinese companies that list on U.S. exchanges and that cook their books and commit rampant fraud to be made more clear and apparent.  Gensler, like many American investors, consider investing in Chinese stocks extremely risky because they don’t completely trust Chinese companies’ financial reporting.

For example, the Chinese company, Luckin Coffee, was found to be a fraud after an internal investigation revealed the fabrication of approximately $300 million in revenue. The investigation found that the fabrication of sales began in April 2019, and involved inflating costs and expenses by almost $200 million, as well as booking $300 million in false revenue.

Recently, the Senate passed a bill that could essentially ban many Chinese companies from listing their shares on U.S. exchanges, or raising money from American investors. The companies would be subject to audits by U.S. regulators for three consecutive years. If they do not comply, they would be banned from trading on the exchanges.

Anne Stevenson-Yang believes that the SEC should not wait for three consecutive years of non-compliance. Instead, she believes that this three year look will not happen expeditiously enougn to save U.S. investors from Chinese fraud and scams. She suggested that U.S. auditors should get “immediate and thorough access” to audit papers. “If they’re not given access, then the companies should immediately be delisted. Why wait three years?”

Delisting Chinese stocks on US exchanges that do not comply with US accounting and listing standards would be justify because of financial fraud or lack of transparency.

Delisting means that a Chinese company traded on an exchange like the Nasdaq would lose access to a broad pool of buyers, sellers and intermediaries. The centralization of these different market participants helps create what’s called liquidity, which in turn allows investors to quickly turn their holdings into cash.

“Chinese financial authorities have gone out of their way to reassure foreign investors and markets have responded with a powerful rally,” said billionaire investor George Soros. “But that is a deception. Xi [Jinping] regards all Chinese companies as instruments of a one-party state. Investors buying into the rally are facing a rude awakening. Xi’s China is not the China [foreign investors] know. He is putting in place an updated version of Mao Zedong’s party.”

References:

  1. https://www.cnbc.com/2020/07/06/investing-fraud-at-china-luckin-coffee-fraud-case-warning-for-investors.html
  2. https://www.fool.com/investing/2021/09/05/should-you-worry-about-fraud-with-chinese-tech-gia/
  3. https://www.fool.com/investing/2020/07/01/luckin-coffee-reveals-findings-of-internal-fraud-i.aspx
  4. https://www.cnbc.com/2021/01/05/heres-what-happens-if-you-own-a-share-of-a-chinese-company-that-gets-delisted.html
  5. https://www.msn.com/en-us/money/markets/investors-who-buy-into-chinas-stock-market-rebound-are-set-for-a-rude-awakening-says-george-soros/ar-AANUgci

Spending Less in Retirement | Kiplinger

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“Expect to spend 55%–80% of your current income annually in retirement.” Retirement Income Replacement Ratio assumes you’ll spend about 55% – 80% of the income you’re making before you retire every year in your retirement.

Effectively, spending patterns change during retirement, according to an analysis of Bureau of Labor Department. For example, starting at age 55, spending tends to increase slightly, as some younger retirees travel or take on new pursuits. In the age range when most are retired at 65+, there is a significant drop in overall spending, according to Fidelity.

This chart shows average annual household spending by age group. Spending ranges from $57,725 per year for those under age 55 to $36,717 per year for those in households over age 75.*

Specifically in retirement, spending on food, entertainment, and transportation remains relatively stable, while spending on housing tends to go down and spending on health care goes up.  According to research by Fidelity Financial Solutions, you should plan on factoring in approximately 15% of your retirement expenses will be related to health care expenses.

Lifestyle is another big factor to consider in estimating how much you will spend in retirement. Increasingly people tap into their savings to create a more active lifestyle that includes travel, adventure, and new activities.

Fidelity’s research suggests if you plan an active lifestyle in retirement, it will,ratchet up your overall retirement budget by 6 percentage points compared with a less active lifestyle.

Reference:

  1. https://www.kiplinger.com/retirement/602328/10-things-youll-spend-less-on-in-retirement
  2. https://www.fidelity.com/viewpoints/retirement/spending-in-retirement

Cyber Security Best Practices

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“Good cybersecurity practices help protect both your privacy and your money.”

2020 was a record-breaking year for data breaches and cyberattacks with cyber crimes becoming an increasingly clear and present threat, both in terms of the sheer number and sophistication of attacks. 

The bad guys always appear able to devise methods to steal your personal financial information, according to The Street. It would be very prudent for investors to embrace a few recommended cybersecurity best practices:

  1. Secure Your Home Wi-Fi & Avoid Public Networks – Cybersecurity starts at home. The best practice is to encrypt your home network, which makes it more difficult for other people to monitor your activities and steal your personal information. In addition, avoid using public Wi-Fi and it may be worth investing in a virtual private network (VPN) service.
  2. Update Your Operating System – Out-of-date operating systems, browsers and antivirus software make it easier for hackers to compromise your devices and access your personal data. Keeping these up to date is a cybersecurity best practice.
  3. Use Strong Passwords & Two-Factor Authentication – Do not use the same password across multiple accounts, one compromised account can result in a major cybersecurity threat. In addition, turn on two-factor authentication, when possible, to further safeguard your accounts.
  4. Beware of Email Scams – Phishing continues to be one of the most prevalent cybersecurity threats. To avoid these scams, the best practice is to never click on suspicious links in an email, especially if you don’t recognize the sender. A good rule of thumb is to never share sensitive information over email, as it can be easily compromised. 
  5. Monitor Your Credit & Digital Footprint – One way to catch financial identity theft early is to keep a close eye on your credit score and report. An additional best practice is to monitor the internet for potentially compromising personal information. For example, you can set up a Google alert for your name, so you’ll receive an email if anything new appears in your search results.  

Investors seeking to preserve and grow their wealth can’t afford to ignore the existing threat of cyber crime.

References :

  1. https://www.thestreet.com/retirement-daily/.amp/lifestyle/5-cybersecurity-best-practices-investors-should-embrace-in-2021

Peter Lynch’s Investing Maxims

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Here are several investing maxims that every investor should memorize and insight repeatably to pick winning stocks, according to Peter Lynch:

  1. A good company usually increases its dividend every year.
  2. You can lose money in a very short time; it takes a long time to make money.
  3. The stock market really is not a gamble; as long as you pick good companies that you think will do well and not because of the stock’s price.
  4. You can make a lot of money in the stock market; but then again, you can lose a lot of money.
  5. You have to research the company before you put your money into it.
  6. When you invest in the stock market, you should always diversify.
  7. You should invest in several stocks becasue for every five you pick, one will do very great, one will be very bad, and three will be okay.
  8. You should never fall in love with a stock…you should always have an open mind.
  9. You shouldn’t just pick a stock: you should do your homework.
  10. Buying stocks of utility companies is good because it gives you higher dividends, but you will make more money in growth stocks.
  11. Just because a stocks goes down doesn’t mean it can’t go lower.
  12. Over the long term, it is better to buy stocks in small companies.
  13. You should not buy a stock because it is cheap, but because you know a lot about it.

Look for shares that offer “growth at a reasonable price” which helps you to avoid two common investment mistakes:

  1. Either paying too much for fast-growing companies;
  2. Or buying seemingly cheap firms without realizing that they have stopped growing.

https://youtu.be/hKdtS_0vQ48

References:

  1. https://www.safalniveshak.com/value-investing-course-peter-lynch-way
  2. https://sites.google.com/site/changechina2050/investment/learn/peter-lynch-s-investment-rules

Building Wealth

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“Building wealth has almost NOTHING to do with your income or your background. It doesn’t matter where you come from. It matters where you’re going.” Chris Hogan

In Everyday Millionaires, author Chris Hogan reveals how ordinary Americans built extraordinary wealth over the long term. In his book, he demonstrates how these ordinary American millionaires live on less than they make, avoid debt, invest, are disciplined and responsible. In short, most accumulated their wealth over the long term by being disciplined and making wise financial decisions, according to Hogan.

Having a particular mindset almost universally contributed to millionaires’ success, Hogan said. Building wealth has almost nothing to do with your income or your background, he states. “It doesn’t matter where you come from. It matters where you’re going.”

“These numbers show that becoming a millionaire doesn’t happen overnight. It’s a marathon, not a sprint. By using the basic tools of saving and investing, you can make your money work for you to build wealth.” Chris Hogan

The National Study of Millionaires is a research study conducted by Ramsey Solutions with over 10,000 U.S. millionaires to gain an understanding of personal finance behaviors and attitudes that factored into their financial success.

The research study provides the facts about what it takes to become a millionaire:

  • Consistency and discipline through investing in a company-sponsored 401(k) is how most millionaires accumulated wealth.
  • Most millionaires are self-made.
  • Many millionaires surveyed never made six figures in a year.
  • Most millionaires come from at or below middle-class income levels.
  • Most millionaires have regular jobs.

About 20 million people in the U.S. have accumulated enough assets to fit the definition of millionaire, according to a 2020 study by Credit Suisse.

According to Hogan, more than 90% of millionaires used several tools to build wealth:

  1. Take personal responsibility – around 97% of millionaires surveyed believed they were in control of their own destiny. That is much higher than the 55% of the general population who held the same opinion.
  2. Practice intentionality (make a plan) – invest in 401k p, get out of debt and stay out of debt.
  3. Spend less then the earn – 94% of millionaires live on less than they make, compared to 55% of the general population”
  4. Look for deals – 93% of millionaires use coupons, some or most of the time, 85% of millionaires use a shopping list and spend less than $200 a month in restaurants eating out
  5. Make a budget – 93% stick to a budget they create and 64% still live on a budget
  6. Consistent – 96% of millionaires do not carry a balance on their credit card”

Most wealthy people end up financially secure because they make distinctly different financial decisions throughout their life than the majority are willing to make. A few of these decisions are the manner in which they spend, save, invest and use debt.

By staying disciplined, living small by significantly spending less than you earn, and understanding how to use debt strategically, you can too build wealth. The process of building your wealth may require you to get comfortable using leverage.

The wealthy tend to use debt in a very strategic and deliberate way. They mostly use it to purchase income-producing assets and rarely to purchase liabilities like the hot new luxury car or to take the desirable exotic vacation (at least not until later in life).

References:

  1. https://www.amazon.com/Everyday-Millionaires-Ordinary-Extraordinary-Wealth_and/dp/0977489523/ref=nodl_
  2. https://cdn.ramseysolutions.net/media/company/pr/everyday-millionaires-research/National-Study-of-Millionaires.pdf
  3. https://www.ramseysolutions.com/store/books/everyday-millionaires-by-chris-hogan
  4. https://www.credit-suisse.com/about-us/en/reports-research/global-wealth-report.html
  5. https://www.cnbc.com/2021/08/24/more-than-90percent-of-millionaires-used-these-five-tools-to-build-wealth.html
  6. https://www.alex-owens.com/rich-use-debt/

Power of Compound Interest

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It is said that Albert Einstein once commented that “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

The Power of Compound Interest shows that you can put your money to work and watch it grow. The power of compounding works by growing your wealth exponentially. It adds the profit earned back to the principal amount and then reinvests the entire sum to accelerate the profit earning process.

When you earn interest on savings and returns on investments, that interest (or returns) then earns interest (or returns) on itself and this amount is compounded monthly. The higher the interest rates, the faster and the more your money grows!

The sooner you start to save, the greater the benefit of compound interest. This is one reason for the success of many investors. Anyone can take advantage of the benefits of compounding through starting a disciplined savings and investing program.

Yet, compounding interest can be good or bad depending on whether you are a saver or a borrower, respectively.

Three factors will influence the rate at which your money compounds. These factors are:

  1. The interest rate or rate of return that you make on your investment.
  2. Time left to grow or the age you start investing. The more time you give your money to build upon itself, the more it compounds.
  3. The tax rate and when you pay taxes on your interest. You will end up with more accumulated wealth if you don’t have to pay taxes, or defer paying taxes until the end of the compounding period rather than at the end of each tax year. This is why tax-deferred accounts are so important.

Finally, it’s important to resist the temptation of seeking higher interest rates or returns, because higher interest rates and returns always bring higher risk. Unless you know what you’re doing, no matter how successful you are along the way, you always want to avoid the possibility of losing money.

Benjamin Graham, known as the father of value investing, was aware of the risk of ‘chasing yield or return’ when he said that “more money has been lost reaching for a little extra return or yield than has been lost to speculating.”

References:

  1. https://www.primerica.com/public/power-compound-interest.html
  2. https://www.thebalance.com/the-power-of-compound-interest-358054