Recently, Li Xiaolai wrote an article about investment "How long is the long term" in the subscribing column "The Road to Wealth and Freedom", which involved the data analysis of several Excel spreadsheets. Many friends came to ask me, these few How is the data in Excel made? Can't understand the investment concept in it?
Today we are going to review this article by Mr. Li Xiaolai, and add details on how to use Excel to make an investment form that can help you achieve financial freedom.
How many years will it take for your investment to double?
The following table shows the doubling data of different annualized compound returns in different years. The top row lists different annualized compound returns. The leftmost column lists the investment period. In order to see how many times the investment income has increased relative to the principal, the principal is set to 1 unit in the table (that is, row A2 in the table).
Annual compound rate of return table
What information can you analyze from this annualized compound rate of return?
Let's take a concrete example to make it easier to understand. Assuming that your annualized compound rate of return is 10% (that is, column B in the table), since the principal is 1 unit, the value of doubling the investment is 2. According to this value, we can find the highest value in the column B in the table. The value close to 2 is 2.14, and then look at the investment year limit value of the row where this value is located is 8 (A10 in the table). What does this mean?
In other words, if your annualized compound rate of return is 10%, it will take 8 years for your investment to double.
Then, if your annualized compound rate of return can reach 15%, the time to double your investment will be shortened to 5 years. If your annualized compound rate of return can reach 30%, the time to double your investment will be shortened to 3 years. The numbers in this table can intuitively tell us a fact: the length of the long-term is likely to be very different for different people.
Li Xiao said that you try your best to make this form yourself, so that you can easily condense the changes in the next ten years on one screen through a spreadsheet. This is actually a kind of relative longevity, because you don't need to experience it yourself, you can go through every situation.
Next, let's see how this annualized compound rate of return table is made?
Seeing this, we first understand how the annualized compound rate of return is calculated.
The annualized compound rate of return is actually the rate of return calculated using compound interest. If you have 1W now, and you invest in a project called knowledge crowdfunding, which can earn 15% per year, then your income plus principal in the nth year is 1W*(1+15%)^n.
In more straightforward terms, the annualized compound rate of return is the compound interest effect, which is equivalent to rolling interest.
We know the formula of annualized compound rate of return and we can make a table,
Principal plus income = principal * (1+ annualized compound rate of return)^n, where n is the investment period, and ^n represents the nth power.
We select the space B3, and then enter the formula in the formula bar: =$B$2*(1+$B$1)^A3. Let's look at the meaning of this formula in detail.
1. $B$2 represents the principal, here is the value in B2 (1 investment unit), the addition symbol $ represents an absolute reference, that is, pull down the cell, this value remains unchanged, and the value always pointed to is $B The value in $2.
2. $B$1 represents the annualized compound rate of return, and the corresponding value here is 10%. Because the annualized compound rate of return in column B is 10%, the absolute reference is also added to match $.
3. A3 is the investment period, and the investment period corresponding to B3 is A3, which is 1 year. The value of this investment period in each space in the B column is different, corresponding to the value in the A column, so the absolute reference symbol $ is not added, which ensures that the subsequent copying formula will automatically change, which is the same as A The values in this column correspond to .
After the formula is set, we press the Enter key, and the value of B3 will be calculated. Pull down the cell, and the values of other cells will be automatically calculated. We found that the investment period in the formula automatically corresponds to the value of column A.
At this point, you will find that the number of digits after the decimal point in each column is too long. In order to be consistent with Mr. Li Xiaolai's table, we set the number of decimal places to two digits. You only need to select the value (B2-B12) to be changed, right-click, select "Set Cell", and then click "Value" to set it.
The values of other columns are processed in the same way, just change the corresponding value in the formula.
2. What is long-term investment
Through the above data analysis, we found that you can shorten the time to double your investment by increasing the annualized compound rate of return. Specifically:
If your annualized compound rate of return is 10% , it will take 8 years for your investment to double .
If your annualized compound rate of return can reach 15% , the time for doubling your investment will be shortened to 5 years .
If your annualized compound rate of return can reach 30% , the time to double your investment will be shortened to 3 years.
But here comes the problem. In reality, you cannot increase the annualized compound rate of return of investment by a large amount. Munger, a partner of Buffett, said, "It is necessary to understand both the importance of compound interest and the difficulty of compound interest." What does it mean?
In fact, many people underestimate the difficulty of compound interest. We often see people easily say "I only need to make a profit of 35% a year, then...", this obviously lacks common sense of mathematics, and has dissatisfaction with long-term rate of return. Realistic fantasy, but also underestimated the difficulty of investment.
So how much annualized compound rate of return is appropriate?
The goals and long-term requirements that Buffett set for himself are:
Buy stocks with an annualized compound rate of return of at least 15%...
Your investment can't be better than Buffett's, so let's be realistic and set your annualized compound rate of return at 15%.
We have also seen another factor that determines your income, which is the investment period. The longer the investment period, the more obvious the compound interest effect. So how long is long term?
Buffett believes that at least ten years or more is considered long-term. The long term here refers to:
The time to double your investment is equivalent to the medium term (5 years).
The time to double and double your investment is equivalent to the long term (10 years).
We can directly find the source of the 10-year long-term value that Buffett said from the table:
Looking back, we actually have a formula that can calculate the long-term. This formula is called the "Rule of 72":
The number of years required to double the investment = 72 / years of compound return value
For example, if your annual compound rate of return is 15%, then you need 72/15=5, that is, it takes about 5 years to double your investment; it takes about 10 years to double your investment again.
3. How to shorten the period of return on investment
You may wonder, if the compound rate of return of Nianhua is 15%, it will take 10 years for the investment to quadruple. Is it too long ? Is there a way to shorten this time?
There is a way, and that is the fixed investment strategy.
Regular investment strategy : Regularly buy a certain (or several) growth stocks in equal amounts. Set a period (period), which could be weekly, monthly, or quarterly. When each deadline is reached, regardless of the change in the stock price, buy the same amount of shares of the company.
Why does the fixed investment strategy work?
We added the "fixed investment strategy" based on the above table. Column B is a newly added column, which represents the accumulated investment amount. Here, it is assumed that an additional investment amount of 1 unit is added every year...
Remarks: Annualized compound return ratio (added to the fixed investment strategy), the formula for calculating the fixed investment income:
M=a(1+x)[-1+(1+x)^n]/x, M is the expected return (excluding the principal), a is the amount of fixed investment per period, x is the annualized compound rate of return, n is the number of regular investment periods (^n in the formula is the nth power).
Corresponding table formula: =1*(1+$D$1)*(-1+(1+$D$1)^A3)/$D$1+1
The power of the right strategy is enormous . From the table, it can be seen that when the compound rate of return of Nianhua is 15%, the time to quadruple the principal is shortened from the previous 10 years to 5 years. It's the result of doing things the right way.
You may say at this time, in the regular investment strategy table, the premise that my capital is 4 times higher is that my total investment is 4 units of principal. The key point is that the extra 3 units (4-1=3) are clearly the result of your implementation of the strategy.
At this point, a secret about investment has finally surfaced, and you have to see it:
One of the important secrets of investing is: You'd better have a stable source of income other than investment, so that you can adopt a fixed investment strategy and effectively shorten what Buffett called long-term...
Li Xiaolai gave a more direct conclusion: the weaker you are, the longer your long-term...
Because you are weak, it will cause you to have no stable source of income other than investment to ensure the long-term effectiveness of fixed investment.
Then, for your long-term investment, what you need to do now is to improve your ability and ensure a stable income other than investment, in order to better achieve financial freedom.
In fact, we redraw the previous compound interest curve. In fact, your ability and income also conform to this compound interest curve.
Here we can draw an important conclusion: find the ability that allows you to generate compound interest income, and then practice growth.
We summarize these two investment tables:
What you should pursue is an investment target with an annualized compound rate of return of around 15%. You should be cautious about those projects on the market that claim to exceed this value.
The income is related to the investment period. The long-term refers to the period of time to quadruple your principal. The long-term value obtained by data analysis is 10 years.
Using a fixed investment strategy can shorten the long-term value.
In order to ensure the long-term effectiveness of the regular investment strategy, you need to improve your ability to ensure a stable income other than investment.
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