I have enumerated the power of compound interest in this blog a few times. I have also suggested the high yielding FGN Bonds as a very effective way of investing for the long term. However, I also think a simple illustration shows just how powerful investing at a favourable interest rate as well as reinvesting all of part of the income at the same rate can drastically improve fortunes.
Imagine if you had just N1million to invest in FGN Bonds at a yield of 12%pa 20 yrs and plan to hold to maturity. That investment grows to N9.6million in 20years if you simply continue to reinvest the interest at the same rate.
Also assume that you plan to withdraw 10% of your original capital every year for the entire life time of the bond. My maths estimate that your original investment would have more than doubled at the end of the period and your gross investment tripled to about N2.4million.
If you however make an effort to invest N1million annually without withdrawing the interest but rather reinvesting it at the same rate this is what you get.
The more startup capital you have the larger the magnitude of return. Follow this link ==> Investing Analysis to perform the exercise your self on a spreadsheet, it is quite easy.
I know a lot of people see investment in bonds and other fixed income security as low yielding and a longer route to quickly increasing the value of your investments. However, bear in mind that it is always better to diversify your portfolio and not put all your eggs in one basket. Fixed Income securities are very good avenues for saving for retirement, your children’s university education, owning a home etc.