The 8th Wonder
Last month I volunteered to attend a ‘Futures Fair’ at my daughter’s school; an annual event but a first time for me.
I spent quite some time thinking how I could frame Financial Planning and Wealth Management in a way that would be interesting to a diverse group of young people from ages 11 to 18.
Obviously, I needed a hook to attract an audience and compete with all the cool industries with their hands-on demos and mountains of freebies, so I went with the bold strapline – Come and discover the 8th Wonder of the World.
I know, setting myself up there!
But actually, when you think about it, Einstein was right to refer to Compound Interest as being The 8th Wonder of the world.
As a way of demonstrating it, I set up an interactive game where you have two options:
Option 1, you start with £1, work hard and double it every day for a month (30 days) or
Option 2, you walk away with £1 million right now
Which option will you choose?
In fact, under option 1, after 30 days of doubling you end up with 5 times more than option 2! Most of the ‘return’ comes in the last few days in a sharp exponential rise in the return curve. There is even a term coined by Yale.edu as 'The unbearable quickness of doubling'.
It’s an extreme example but is shows the power of exponential growth.
There is another analogy for this you may have heard of: the grain of rice on square 1 of the chess board, double the amount on each subsequent square…. what do you end up with on square 64? …Well, it’s a number few can comprehend – 9,223,372,036,854,775,808 (a large number). There’s a cool video on You tube which demonstrates the final pile of rice on square 64 is larger than Mount Everest!
Why is it important to understand Compound interest, well in the rest of the quote, Einstein goes on to say “…. he who understands it, earns it…he who doesn’t, pays it”
This allowed me to expand on the benefits of investing over the long term and the detriment of accruing credit card debt. How much to save over different time periods with differing returns to hit a £1 million target, and the powerful eroding effect of inflation over time.
I was able to talk about one of the things that get in the way of achieving financial freedom – investor behaviour, which allowed me to use two of my favourite diagrams.
The ‘behaviour gap’ is also illustrated by many financial institutions looking at UK and US market returns and analysing the effect of missing ‘the best 10 days’ etc. Usually as a result of trying to ‘time the market’, but I’m with Warren Buffet on this one –
"The stock market is a mechanism for transferring wealth from the impatient to the patient."
This is perhaps something we should all write on a post it note and stick on the bathroom mirror so we see it every day, especially as the erratic actions of Trump are playing havoc with market volatility and our ‘lizard brain’ behavioural biases kick in.
If anything, putting it all together inspired me to write this article. I may not have convinced little Freddie that Financial Planning is a way cooler career choice than Aerospace Design, but hopefully it will have sparked some interest in understanding money and ignited a little interest for the future.
This article was prepared by Chris Green, our Head of Financial Planning. We always appreciate your feedback. If you have enjoyed this article or have any specific topics you would like to see addressed in future newsletters, please email us at FPTeam@city-asset.co.uk.