Lump sums and Compound interest

[johnh77]

Hi all…

I’ve only just found out how compound interest works. E.g. £200 a month over 35 years 12% annually compounded interest = £1 million

As I’m coming to this late (I’m 45) would it be worth me trying to free up some money in a house I own out right? Maybe remortgage?
Using a compound interest calc I could use a lump sum of £170,000 and some small monthly payments over 15 years to get a similar result.

Has anyone else done this?

 

[BigDeal]

Albert Einstein called compound interest the 8th wonder of the world.

Where were you intending to invest your funds? If you plan to hold cash then you would almost certainly earn less than the interest you pay on your remortgage borrowing costs

 

[Quantt]

Hi all…

I’ve only just found out how compound interest works. E.g. £200 a month over 35 years 12% annually compounded interest = £1 million

As I’m coming to this late (I’m 45) would it be worth me trying to free up some money in a house I own out right? Maybe remortgage?
Using a compound interest calc I could use a lump sum of £170,000 and some small monthly payments over 15 years to get a similar result.

Has anyone else done this?

Better Late Than Never This is the corner stone of investing IMHO..
How do you plan to get those 12% return a year every year as this works the other way around too, you can have compound effect when losing money as well...

 

[Quantt]

Albert Einstein called compound interest the 8th wonder of the world.

Where were you intending to invest your funds? If you plan to hold cash then you would almost certainly earn less than the interest you pay on your remortgage borrowing costs

I believe the proper quote is this:

“Compound interest is the most powerful force in the universe.”
Albert Einstein

 

[johnh77]

Albert Einstein called compound interest the 8th wonder of the world.

Where were you intending to invest your funds? If you plan to hold cash then you would almost certainly earn less than the interest you pay on your remortgage borrowing costs

I was thinking S&P 500 if I could free up money in the house and add £20k per year to my stocks and shares ISA

 

[BigDeal]

I believe the proper quote is this:

“Compound interest is the most powerful force in the universe.”
Albert Einstein

Aha OK, well I knew he considered it quite significant !

 

[johnh77]

Better Late Than Never This is the corner stone of investing IMHO..
How do you plan to get those 12% return a year every year as this works the other way around too, you can have compound effect when losing money as well...

I’ve looked historically at the S&P 500 and last 10 year average is 12%

 

[Quantt]

I’ve looked historically at the S&P 500 and last 10 year average is 12%

The problem with the last 10 years is that we were in a bull market, one piece of advice, when doing back testing a research try to do at least one market cycle from boom to bust to see how the investment will perform in a bear markets... Since I am researching SP500 for a living, I can tell you it is better to use 8% for long term planning as it includes few bull and bear markets, also be prepared to face 50% drawdowns as we had 2 in the last 20 years and you need 100% gain to offset 50% loss

 

[BigDeal]

@johnh77 I would not suggest you borrow money to make investments. This has been debated before in another thread somewhere on the site, so you may want to try to find that and read through. Using your home as collateral and putting it at risk is not a good idea, particularly in your current circumstances

 

[johnh77]

The problem with the last 10 years is that we were in a bull market, one piece of advice, when doing back testing a research try to do at least one market cycle from boom to bust to see how the investment will perform in a bear markets... Since I am researching SP500 for a living, I can tell you it is better to use 8% for long term planning as it includes few bull and bear markets, also be prepared to face 50% drawdowns as we had 2 in the last 20 years and you need 100% gain to offset 50% loss

Ahhh okay yes that makes sense, I found the average was 10% since inception so I thought 12% might be a pretty realistic bet but 8% is still okay.

I’ve just looked at drawdowns? Is that 50% an average over drawdowns over a specific time period or do you mean 1 offs when it dips that low?

Please bear 👀 with me if that’s a daft question I’m brand new to everything financial. All this is another world it’s literally mind blowing

 

[johnh77]

@johnh77 I would not suggest you borrow money to make investments. This has been debated before in another thread somewhere on the site, so you may want to try to find that and read through. Using your home as collateral and putting it at risk is not a good idea, particularly in your current circumstances

I’m renting another house out so I’d be thinking about using that to borrow against. However the thought does flip my stomach!! My current situation is financially terrible after getting short changed in a redundancy and my own company not surviving lockdown. Freeing up money in that house seems like the only way I could raise a significant amount to invest. I’m not in employment at the moment so I don’t even know if a re-mortgage is possible to be honest.

My crude plan is to go back to car trading (something I did 20 years ago) and make some day to day living money and learn to day trade with a minimum amount until I can be profitable.

 

[timsk]

I’m renting another house out so I’d be thinking about using that to borrow against. However the thought does flip my stomach!! My current situation is financially terrible after getting short changed in a redundancy and my own company not surviving lockdown. Freeing up money in that house seems like the only way I could raise a significant amount to invest. I’m not in employment at the moment so I don’t even know if a re-mortgage is possible to be honest.

My crude plan is to go back to car trading (something I did 20 years ago) and make some day to day living money and learn to day trade with a minimum amount until I can be profitable.

Hi John,
If I've understood you correctly, apart from being (temporarily) unemployed, you own your own home outright and have a rental property. I assume the income from the latter pays for a mortgage on it? If this is the case, my advice would be to stay as you are. Raising additional funds from the property and/or diverting the rental income away from paying the mortgage and into trading will end in tears. You will regret doing it, no ifs or buts about it. Furthermore, putting that money into a relatively 'safe' ISA is a less bad idea, but it's still not a good one, IMO! The stock market is far more likely to crash than it is to surge higher, whereas, rental income will remain bullish while the demand is high. Save the rental income as aggressively as you can and, using your new found knowledge about compound interest, pay off any mortgage debt (and any other debt) asap. Never, ever borrow money to trade with.

There's an old adage on here that must have been posted a 1,000 times over the years which says: 'only trade with money you can afford to lose'. It's very sound advice, if only for one simple reason. Namely: most people do lose and very, very few people trade for a living and any make any money - let alone good money - doing it. Your son's mate who's allegedly making £2k a month probably got lucky on one or two trades - just as a gambler can have a winning streak at the roulette table. The chances of him still trading in 6 months time are close to zero. Unless he has rock solid evidence over a sustained period of time to support his claims, take anything he says (or your son says he says) with a bucket load of salt!

Tim.

 

[Quantt]

Ahhh okay yes that makes sense, I found the average was 10% since inception so I thought 12% might be a pretty realistic bet but 8% is still okay.

I’ve just looked at drawdowns? Is that 50% an average over drawdowns over a specific time period or do you mean 1 offs when it dips that low?

Please bear 👀 with me if that’s a daft question I’m brand new to everything financial. All this is another world it’s literally mind blowing

There are no stupid questions, better ask and learn from the others than making mistakes on your own

“Smart people learn from their mistakes. But the real sharp ones learn from the mistakes of others.”

For the drawdowns, they happen over time, check this picture here for S&P500, but basically here the the worst:

March 9, 2009 -56.48%
October 9, 2002 -49.16%
March 23, 2020 -34.10%
October 12, 2022 -25.37%
December 24, 2018 -20.18%

 

[Quantt]

One more to add, I completely agree with Tim here, focus on your car business idea and when you get it up and running and have some extra money you can give the investing a try, for day trading, etc, you will need years of study and still not guaranteed that you will make money with it...

 

[johnh77]

Hi John,
If I've understood you correctly, apart from being (temporarily) unemployed, you own your own home outright and have a rental property. I assume the income from the latter pays for a mortgage on it? If this is the case, my advice would be to stay as you are. Raising additional funds from the property and/or diverting the rental income away from paying the mortgage and into trading will end in tears. You will regret doing it, no ifs or buts about it. Furthermore, putting that money into a relatively 'safe' ISA is a less bad idea, but it's still not a good one, IMO! The stock market is far more likely to crash than it is to surge higher, whereas, rental income will remain bullish while the demand is high. Save the rental income as aggressively as you can and, using your new found knowledge about compound interest, pay off any mortgage debt (and any other debt) asap. Never, ever borrow money to trade with.

There's an old adage on here that must have been posted a 1,000 times over the years which says: 'only trade with money you can afford to lose'. It's very sound advice, if only for one simple reason. Namely: most people do lose and very, very few people trade for a living and any make any money - let alone good money - doing it. Your son's mate who's allegedly making £2k a month probably got lucky on one or two trades - just as a gambler can have a winning streak at the roulette table. The chances of him still trading in 6 months time are close to zero. Unless he has rock solid evidence over a sustained period of time to support his claims, take anything he says (or your son says he says) with a bucket load of salt!

Tim.

Hi Tim,

I own the rental outright. I live in the one I still pay a mortgage on. I was thinking re-mortgage the rental to free up a lump sum and the rent would cover the re-mortgage payments.
Again this could be pie in the sky it’s not something I’ve looked into yet.
My thoughts were along the lines of if I could put 160-180k into SP500 it’s at 12% ish at the moment so compound interest over 15 years would potentially leave me in a much better position. In this screen shot even if the return averaged 8% that would be around £600k. Conversely in 15 years time I’m not expecting the rental property to be worth £600k (it’s probably worth £200k at the moment).
So is that £600k vs the house being worth maybe £300k max.., I don’t know. But that was my logic. Would that make any more sense?

 

[johnh77]

There are no stupid questions, better ask and learn from the others than making mistakes on your own

“Smart people learn from their mistakes. But the real sharp ones learn from the mistakes of others.”

For the drawdowns, they happen over time, check this picture here for S&P500, but basically here the the worst:

March 9, 2009 -56.48%
October 9, 2002 -49.16%
March 23, 2020 -34.10%
October 12, 2022 -25.37%
December 24, 2018 -20.18%

That’s 5 significant dips in 20 years!! So I can see it can be volatile. So even though the recent average has been 12% is this what drags it down to 8%?

 

[johnh77]

One more to add, I completely agree with Tim here, focus on your car business idea and when you get it up and running and have some extra money you can give the investing a try, for day trading, etc, you will need years of study and still not guaranteed that you will make money with it...

Agreed I definitely need to make a move on the cars and get that stable. I’ve been out of the game for so long even that will be like starting again. I’m still hoping to learn stocks alongside.

For the long haul the S&P500 and Total US market look fairly reliable when looking at decades. That’s why it (on the surface from an absolute newbie point of view) seem pretty safe. Historically it looks like it always recovers from every dip, where’s the biggest risk do you think?

 

[timsk]

I own the rental outright. I live in the one I still pay a mortgage on. I was thinking re-mortgage the rental to free up a lump sum and the rent would cover the re-mortgage payments.
Again this could be pie in the sky it’s not something I’ve looked into yet.

Hi John,
I'm not an investment professional and not qualified to offer investment advice, so my comments are my own views and may not be appropriate to you and your circumstances. That said . . .

Last year I was in a similar position to you in as much as I had a lump sum and was weighing up the pros and cons of buying a rental property or investing the capital myself in shares, ISAs and ETFs etc. For me, it was a no-brainer. Demand for rental property is incredibly high and I'm getting a return of circa 5% p/a which is better than any bank or building society. (I accept that interest rates are rising - and likely will go up again today - so the balance between property Vs stocks etc. does need to be reviewed periodically.)

My thoughts were along the lines of if I could put 160-180k into SP500 it’s at 12% ish at the moment so compound interest over 15 years would potentially leave me in a much better position. In this screen shot even if the return averaged 8% that would be around £600k. Conversely in 15 years time I’m not expecting the rental property to be worth £600k (it’s probably worth £200k at the moment).
So is that £600k vs the house being worth maybe £300k max.., I don’t know. But that was my logic. Would that make any more sense?

It does make sense and, over time, you might be proved right. However, keep in mind that past performance is no guarantee of future results, evidenced by the performance of the S&P last year! Personally, I think your 12% figure is extremely optimistic and recommend you take quantt's advice and base your assumptions on 8% p/a at best.

It largely boils down to what you think is most likely to happen in the future. My view is that we're heading for a global financial crisis (especially in the west) that will eclipse that of 2008/9. (There are hints of cracks appearing in the dam and water seeping through with the recent collapse of SVB and Credit Suisse.) This means it will be a very long time before the S&P offers returns in the order of 8% - let alone the 12% you're basing your decisions upon. Consequently, I want my capital invested in physical assets that others can't 'disappear' or 'steal' from me. Regardless of what happens to the S&P, people will always need - and be prepared to pay for - a roof over their heads.
Tim.

 

[johnh77]

Hi John,
I'm not an investment professional and not qualified to offer investment advice, so my comments are my own views and may not be appropriate to you and your circumstances. That said . . .

Last year I was in a similar position to you in as much as I had a lump sum and was weighing up the pros and cons of buying a rental property or investing the capital myself in shares, ISAs and ETFs etc. For me, it was a no-brainer. Demand for rental property is incredibly high and I'm getting a return of circa 5% p/a which is better than any bank or building society. (I accept that interest rates are rising - and likely will go up again today - so the balance between property Vs stocks etc. does need to be reviewed periodically.)

It does make sense and, over time, you might be proved right. However, keep in mind that past performance is no guarantee of future results, evidenced by the performance of the S&P last year! Personally, I think your 12% figure is extremely optimistic and recommend you take quantt's advice and base your assumptions on 8% p/a at best.

It largely boils down to what you think is most likely to happen in the future. My view is that we're heading for a global financial crisis (especially in the west) that will eclipse that of 2008/9. (There are hints of cracks appearing in the dam and water seeping through with the recent collapse of SVB and Credit Suisse.) This means it will be a very long time before the S&P offers returns in the order of 8% - let alone the 12% you're basing your decisions upon. Consequently, I want my capital invested in physical assets that others can't 'disappear' or 'steal' from me. Regardless of what happens to the S&P, people will always need - and be prepared to pay for - a roof over their heads.
Tim.

Thanks Tim appreciate your views. I’m at a Samual Leeds property investment course tomorrow so I’ll see what the options are there. I might be able to free up money in the house I own outright and buy another. I’m unsure as the compound interest after using a lump sum is attractive even at 8%. But as you’ve said, physical assets are safer.