I am often surprised at the casual approach of many people to a small difference in return on investments. How do people react to say a return of 11% per annum compared to a return of 12% per annum.
Most people will not see a large difference and some may respond with a shrug of the shoulders. This is because in absolute terms, it is difficult to comprehend the impact of the 1% difference in return. This is because we are not able to visualize or see the impact over time very easily.
To understand the real impact of the 1%, let us use a simple illustration. Let us assume that an investor has a capital of INR 10,000 to invest. Let us make another important assumption. The investment lifetime of any young person is about 35 years. What will be the final result of this 10,000 invested at 11% over the period of 35 years. Compounded annually at 11%, this small amount of 10,000 will grow to an interesting 3,85,748 over the period of 35 years. While this looks impressive, what will be the final outcome me if the rate of return was just 1% at 12%?
10,000 invested at a rate of return of 12% over a 35 years period will grow to a whopping 5,27,996!!
That is a large difference of 1,42,000 or 37% more money at the end of 35 years. Now that you can see the difference between the final result of investing at 11% or 12%, would you look at the 1% difference the same way?
Interesting right?
Have you been a victim of such thinking in the past? Let me know in the comments below.
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