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How impactful rate of return is?

Rate of return Malaysia stock market

One of the most concerned questions about investment is that why should I invest? And how much difference can investment made? In this context, we are going to look at the difference of investing and not.

As shown in the table below, the initial capital is set at RM10,000. The capital is then compounded for 10 years, with different rate of return ranging from 4% to 20%.

4% ROR is easily obtained by putting the capital in fixed deposit. 6-8% is achievable by choosing a high dividend stock. While others might depend on capital gain that your stock could get. 20% is basically a hard to achieve figure, but for illustration purpose, let’s take it into consideration.

YearsRate of Return

As we can see, by putting money into FD (4%), after 10 years, the capital has increased by a total of 50%. Meanwhile, buying a dividend stock with 8% ROR, allow us to double the amount of capital we have at year 0. From here, it clearly shows the importance of investing! Yes, you might say that investing has higher risk, but an 8% is easily achievable by choosing the right dividend stock. Although the share price might fluctuate, be patient and hold it tight. This will ensure you to have a 8% ROR every year. Another interesting observation to take note is that even though the ROR is double from 4% to 8%, the increment after 10 years is more than doubled.

Ratio of increment in capital after 10 years = (21589 – 10000) / (14802 – 10000) = 2.41
Why is it so? This is because of the compounding power through time! When ROR is doubled, the increment will also double, but only in Year 1. After that, the increment will be way more than 2x.

In fact, after 30 years, when you almost retire, assuming a ROR of 8%, you will have nearly 3x more asset than getting a 4% fixed deposit interest.

In conclusion, this table gives you a rough idea on how impactful ROR is. If you want to earn faster, definitely you have to aim for a higher ROR. After all, it depends on individual to choose a suitable ROR for themselves, because a higher ROR comes with a higher risk. 

According to the statistic from tradingeconomy.com, Malaysia inflation rate is averaged at 3.67 (1973 to 2015). This means that fixed deposit ROR could not even cover the rise of inflation rate. Hence, as a rule of thumb, try not to play safe and put your money into fixed deposit. The ROR is way too low. Instead, look for a good dividend stock!

** How good it will be if you could get 20% ROR every year. After 10 years, your capital will be 6x larger! Wow. But it is better to set a realistic goal. Haha.

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