Step One! Understanding the stock market

November 25th, 2009 by admin

Question 1: “Why should I invest?” The underlying answer that most of us have to that question, even if we don’t say it, “That’s too risky. I know people who have lost everything doing that. Am I unaware, I have a savings account.”

So the first answer to refining yourself is to ask yourself: “Do I know what the Rule Of 72 is?” and “How does it affect me, anyway?”

What Is The Rule Of 72?
This Rule dates back hundreds of years. During the 15th century a mathematician determined that it is easy to know how long it takes money to double, provided you know The Rule Of 72 and the interest rate. {Luca didn’t explain the rule much, meaning it possibly goes back even further than that, but the principle still holds true today}.

{Here’s an example: start with any amount of money, let’s say 0.00 to be simple. You invest it at 10%. Using the simplest of math, you take 72 and divide it by 10, and you get the number 7.2, which means your money will double to 0.00 in 7.2 years}.

{If you have 0.00 and you invest in at 7.2%, you take 72 and divide it by 7.2, and you get the number 10, which means your money will double to 0.00 in 10 years.
The same exact principle is true if you start with 0.00 or 0,000.00. That’s all the harder it is}.

Now, is it accurate? Well, not exactly. If you assume that in The Rule Of 72 interest compounds yearly you are happy, how would you feel if it compounds monthly or even daily. The general idea is this for a very accurate answer you should use a financial calculator found on www.uscertifiedfinancialplanner.com.

What does this have to do with me?
Let’s assume you really are thinking like our hypothetical person at the start of this article, and you “know better” than to invest in the stock market, so you just dump some money every month in a savings account. Don’t get comfortable with the idea that you’re better off than people who don’t save at all – you are, but is it enough?

Let’s see.
So you’re in a savings account which, in today’s market, perhaps pays you somewhere between 0.2% most are getting 3%, all of your assets and of course your mortgage. If you’re in the latter of those two groups and earning 3%, then we take 72 and divide it by 3, and we get….to have your money double in 24 years. Ouch! I think you could do much better.

If you are the former and this 0 is what you are earning.2% yeah this would be great if you are looking to double your money in 3,600 years! Easy enough?

Are you retired and only buying 3% CD’s? If inflation is zero and you don’t withdraw ANYTHING your money will double in 24 years. Even though that inflation rate is pretty close to the truth right now, it’s nowhere close to normal, since the average inflation rate in the United States is around 3% for the last 200 years. Truth is most of the time, a 3% return is no return at all.

What does this have to do with the stock market? Your involvement IS the answer to the first question. Being involved and having an advisor to help you stay ahead of the game will keep your goals in perspective and help you support yourself and your family with a lot less stress.