0947: “Investing”

[Qaanol]

http://xkcd.com/947

Title text: “But Einstein said it was the most powerful force in the universe, and I take all my investment advice from flippant remarks by theoretical physicists making small talk at parties.”

Factually accurate?

[glasnt]

I'm getting $1,219 <_<

It's been ages since I've done compound math ("And yet you'll use it every day in adult life!") but my excel spreadsheet confirms.

Also, thirdparty compound interest calculator agrees with me.




Edit: Hi internet! This comic originally cited $1,279 as the final money count of 2% interest over 10 years, compounded annually. Most of the first page of conversation is related to that. The comic has since been updated. Do not be confused. Lots of love, glasnt.

[vortighast]

$1,219 here as well. And interesting...we learned this in engineering economics last Thursday...GOOMHR!

[madock345]

Where else would you take advice of any kind?

[SolkaTruesilver]

So?

2% is really crappy investment to have. Better invest in government bonds instead.

And it's still 219$ you wouldn't have made if you just kept it under your pillow case. However, it's so crappy rate of return it doesn't beat inflation...

[iChef]

Plus at only 2% your not beating inflation so your actual purchasing power is going down. Better off finding a nice fund that averages around 8% and consistently depositing money every paycheck rather than just throwing 1,000 in and letting it go. Your best tool in investing isn't interest, it's the discipline to pay yourself first no matter how small an amount and keep at it over 30+ years. I've gotten into this argument many times with family members that insist on playing the lottery (The state tax on people who are bad at math). With interest that dollar a day over many many years will always pay more invested than it will in lottery tickets otherwise the state wouldn't be running a lottery, unless you are super incredibly lucky.

[josiahstevenson]

related: I hate it when people say something increases "exponentially" when they mean something more like "dramatically". As in this situation, exponential growth need not be very dramatic.

[ajd]

If you compound continuously (which I believe most banks do, you use the formula (principal) * exp(annual rate * number of years), which I calculate coming out to $1,221 for this example...still lower than the comic says.

[Jyrki]

The problem is that a decade is too short a time to show the nature of the asymptotics. If the population of the Earth keeps growing at the rate of 2% per year, in a few dozen millennia the volume of human flesh, if collected together in a single ball, will have a radius growing at the speed of light. I leave finding the exact figure as an exercise to the interested reader In your face, Pope.

[pcb_duffer]

Maybe Big Al was talking about a situation where he would be gone for a very long time, over which the compounding effect would do its magic. But it would seem like a very short time to him....

[mania]

I've gotten into this argument many times with family members that insist on playing the lottery (The state tax on people who are bad at math).

I disagree with this. It's looking at lottery too linearly. ie you're of the opinion that for every $1 you put in, you get 50c back out.

That's not how it works.

For many, lottery is the only chance they'll ever be truly rich. It gives them a chance at reaching something that they'll never reach through low risk investment and minimum wage alone. Without winning, they'd never be able to afford a yacht for instance.

To ignore both the "fun factor" of gambling and the dream of one day to be living the life of luxury, you've just ignored the entire point of the game. And it is that - a game, a form of entertainment.

Now I'm not saying it's at all a wise investment decision, and I'm not recommending people play. But this "state tax on people who are bad at math", oft-repeated, I feel is incorrect. The players may have actually done the maths, worked out the $10 a week they're spending is not hurting them and the dream of one day having a lot of money (along with the very slim chance of it actually happening) is worth it to them. I mean, on the one hand you have $10 a week * 15 years = $7800 spent on the lottery, with maybe $3900 returned. On the other, you have low risk investment: 7% interest, the same $7800, 15 years - you'd end up around $10k in today's terms. So the dream is maybe costing them $6000 for the 15 years ($10k - $3900). My hobbies - technology and cars - are beyond any doubt going to cost me a lot more than that over the same period. So who am I to judge?

[augurey]

Who considers a savings account investing? At 8% you're at 2,158 after 10 years -- more if you reinvest your dividends.

[Cecil]

I'm getting $1,219 <_<

It's been ages since I've done compound math ("And yet you'll use it every day in adult life!") but my excel spreadsheet confirms.

Also, thirdparty compound interest calculator agrees with me.

I get $1,221.40, but that's compounded the only way that makes mathematical sense, continuously.

[Cecil]

Who considers a savings account investing? At 8% you're at 2,158 after 10 years -- more if you reinvest your dividends.

What are you investing in that grows 8% and also provides a steady dividend?

[RicoSuave]

I think I'm doing this right, so there is no positive number of times to compound the interest per year to get the result from the comic.

http://www.wolframalpha.com/input/?i=1279+%3D+1000%281%2B0.02%2Fn%29^%2810n%29

[meh]

The problem is that a decade is too short a time to show the nature of the asymptotics.

I realize you were leading up to a joke, but I think the point is that you can just spend the $219 now and sock away $1,219 in 10 years when you're earning more and end up at the same place. Of course that's assuming you want to save only that net present value of money, ever.

I find the people who talk about the reliable 8% investments charming, after the recent crash. A lot of my savings were in funds averaging about 8%. Up to 2008. It really, really depends on which 30 years or so you're talking about, and when during that period disaster strikes.

[A_of_s_t]

For some reason, I always think compound interest is going to yield a crazy amount of money. Alas, I have the same faults as our stick figure protagonist.

[lalop]

Now I'm not saying it's at all a wise investment decision, and I'm not recommending people play. But this "state tax on people who are bad at math", oft-repeated, I feel is incorrect. The players may have actually done the maths, worked out the $10 a week they're spending is not hurting them and the dream of one day having a lot of money (along with the very slim chance of it actually happening) is worth it to them.

So people are throwing money away to get an endorphin rush, and the state is cleaning up at the bottom. While, fair enough, what you do with your money is up to you, I would just think there are better ways to invest it. (Even if you invested in an xbox, for instance, you'd at least get the xbox back in return!)

[niknowj]

Women taking advice from parties more than men.

[karanj]

I think I'm doing this right, so there is no positive number of times to compound the interest per year to get the result from the comic.

http://www.wolframalpha.com/input/?i=12 ... .02%2Fn%29^%2810n%29

... uh, not sure what you're doing there, but http://www.wolframalpha.com/input/?i=12 ... 02%2F12%29^%28n*12%29 gives 12.31 years to achieve the result in the comic above.

[karanj]

For some reason, I always think compound interest is going to yield a crazy amount of money. Alas, I have the same faults as our stick figure protagonist.

It depends on your starting capital and rate of interest. If I was to put $20,000 at 6% (achievable here in Australia) compounding monthly, the return is $16,387 after 10 years. Annually, it's $15,817. Simple interest is $12,000 - so the difference adds up.

[toodles]

$1,218.99 for 2% compounded annually. (Principle*(1+interest_per_event)^num_of_events)
$1,221.40 for 2% compounded continually. (Principle*e^(interest_per_period*number_of_periods))

I don't figure out he gets that result.

[Anonymously Famous]

As with everyone, I found the amount in the comic to be incorrect.

A part of my investment strategy right now includes paying off my debt. I recently payed off my car, for example, so my car payment is going toward my credit card, and then I'll take care of student loans, etc.

Then, after I'm not paying interest, I can start investing more to make interest.

[Matt228]

I registered just to point out that 1,219 looks a lot like 1,279 when hand written. This is the reason I cross 7s.

[ijuin]

The problem is that a decade is too short a time to show the nature of the asymptotics. If the population of the Earth keeps growing at the rate of 2% per year, in a few dozen millennia the volume of human flesh, if collected together in a single ball, will have a radius growing at the speed of light. I leave finding the exact figure as an exercise to the interested reader In your face, Pope.

Hmmm *gets out Ye Olde Slide Rule because it's easier than remembering all of the command shortcuts on Ye Newe Graphing Calculator* Assuming 7.0 billion humans at present, and a mean body mass of 70 kg . . .

After 1,000 years: 3.39 quintillion people (240 quadrillion tons)
After 2,000 years: 1.64 octillion people (115 septillion tons = about nineteen thousand times the mass of Earth)
After 3,000 years: 8.95 * 10^35 people (5.5 * 10^34 tons = about 28 thousand solar masses)
After 4,000 years: 3.85 * 10^44 people (2.7 * 10^43 tons = about 13.5 trillion solar masses = 135 Milky Ways, assuming 100 billion solar masses in the Milky Way)
After 5,000 years: 1.86 * 10^53 people (1.3 * 10^52 tons = about 65 billion Milky Ways = about eighty times the mass of the observable universe according to Wikipedia at http://en.wikipedia.org/wiki/Mass_of_th ... verse#Mass )

[SEE]

The key, of course, is to find a gold-standard bank that'll still be operating in 1,000 years, and a way to skip ahead to then. Then your half-ounce of gold today will be redeemable for just under 200 million ounces.

[RAGBRAIvet]

Does this mean that Douglas Adams was wrong, and I won't be able to afford my dinner at Milliways?

[Chalnoth]

So?

2% is really crappy investment to have. Better invest in government bonds instead.

And it's still 219$ you wouldn't have made if you just kept it under your pillow case. However, it's so crappy rate of return it doesn't beat inflation...

2% is the current rate of interest on 10-year US treasury bills.

Anyway, one nice rule of thumb to understand the effect of compound interest is that you divide 70 years by the interest rate to get how many years it takes to double your investment (approximately). So if you get 2% interest, your investment will be doubled after about 35 years. If you can invest at 10% interest, your investment will be doubled after about 7 years.

[intertubes]

Considering my savings gets something like .25%, 2% would be a godsend. I made 54 cents in interest last month.

[Red Hal]

Both 1,219 and 1,221 are "correct" depending on the method of payment. If interest is calculated annually, the lower figure applies. If calculated monthly, then the higher figure pops out. In neither these cases nor continuously do you get 1279.

[Richard.]

That's why you invest 10,000 to start. Not 1,000. The more you invest the more you get for free.

You can simultaneously "make more money" like the comic states and invest. The invested money literally does nothing but give you more money. To not invest is to be retarded!

[Monotonius]

Does this comic mean that xkcd now passes the Bechdel Test? (viewtopic.php?f=8&t=65510)

[Tomawar40]

I couldn't just sit by and watch you all disprove math without considering other possibilities.
Sure, he may not have mentioned an annual addition, but consider an annual addition of $5.22.
Current Principal $1,000
Annual Addition $5.22
Years to grow 10
Interest Rate 2%
Compound Interest 12 times annually (once a month)
Make additions at start of each compounding period
Future Value: $1,279.03
I assume he rounded.

[Xentropy]

That's why you invest 10,000 to start. Not 1,000. The more you invest the more you get for free.

You can simultaneously "make more money" like the comic states and invest. The invested money literally does nothing but give you more money. To not invest is to be retarded!

Except if inflation is 3%, then the $12190 you have in 10 years from investing $10000 now will buy $9070 in today's dollars worth of stuff.

I've found, at least for the decade I've been in any position to invest, any investment that beats inflation is risky, and so far all my risky investments have gone down. I have less money in all of my accounts than I put in, before accounting for inflation. I'd rather have spent the damn money and had fun with it like most 20-somethings. Instead, I've got basically nothing to show besides what an idiot I am for being a saver instead of a spender in this economy. At least I don't have debts, but I'd sure like to have spent my money instead of giving it to wherever losses go when the market turns irrational.

If I'd been born 10 years earlier and been investing in the 90's, though, whew, I'd probably be a multimillionaire.

[phlip]

I registered just to point out that 1,219 looks a lot like 1,279 when hand written. This is the reason I cross 7s.

This is what I figure happened, too... I've lost count of the number of times I've written down a 0 and later read back a 6... with my handwriting 1's and 7's are rather distinct, but I can see how a different handwriting style would have them be confusable. He probably wrote $1,219 down in his notes and then when he went to draw the comic, he misread it as $1,279.

[Joneleth]

I think the point is investing at least keeps you from losing money - or for very low return rates *as much* money - as you would keeping it in a bank. Even if that low interest rate means your money will have slightly less purchasing power after 10 years, in the end, it's still your money. If you spent it on frivolous things, it's gone, and you won't have it to invest if/when you really *can* turn a profit on it. Just like it was silly to assume the exorbitant growth of the 90s would last forever, it's also silly to assume this recession will last forever. All the money I invest is my "burn" money anyway - if I spent it, I'd be on something worthless. I realize that not everyone makes significantly more money than their expenses - but if you do, I strongly recommend investing it now instead of spending it and regretting it in 10 years when you're in need, or the market is booming and you don't have money to profit from it.

[nathanmacinnes]

Someone's already pointed out the Hitchhikers reference. But does anyone remember that Futurama episode where Fry goes back to his old bank and his few cents have turned into billions of dollars? I made sure I verified their calculations when I saw it. Can't remember the figures now though.

[Dhes]

You should just spend the $1000.
If you had a $1000 in your account at an interest of 2% in 2001 you would have $1218 (or $1221 if it’s monthly) in 2011.
Due to inflation something that would have costs $1000 in 2001 will cost $1276 in 2011, so in 10 years you lost $58.
Never ever save your money, that’s what the “Man” wants you to do, instead give it to me.

[neoliminal]

Remember that when you invest you are loaning the bank money.

The bank then loans that money to someone who is willing to pay them more than they will pay you.

For example, when you invest in a bank you may get 2% interest while the bank will happily charge you 26% on your credit card (plus fees). Then if you want to take your money out of an ATM to buy, say, $100 worth of 'fun', the ATM fee will be $2, or 2%. Thus you've lost your initial investment by putting it into a banking system with an ATM that charges $2.

In fact, there's almost no scenario where putting money into a bank makes any sense.

[mister k]

Remember that when you invest you are loaning the bank money.

The bank then loans that money to someone who is willing to pay them more than they will pay you.

For example, when you invest in a bank you may get 2% interest while the bank will happily charge you 26% on your credit card (plus fees). Then if you want to take your money out of an ATM to buy, say, $100 worth of 'fun', the ATM fee will be $2, or 2%. Thus you've lost your initial investment by putting it into a banking system with an ATM that charges $2.

In fact, there's almost no scenario where putting money into a bank makes any sense.

Really? None? As long as my ATM charges me money... which most don't. At least they don't in the UK, anyway, which I assume is where everyone lives.