Ditch that Merry-Go-Round Club Now - myStocks: Opinion and Commentary

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Ditch that Merry-Go-Round Club Now

By George Mangs
Comments Wednesday, March 15, 2017 at 4:00 PM EAT

The "rule of 72" is a simplified way to calculate how long your investment will take to double, given a known annual rate of return.

The simple formula is expressed as;

xy = 72 where x = annual interest rate and y = number of years.

You divide 72 by the annual rate of return (x) that you receive on your investments, and the resultant number is a rough estimate of years (y) it takes to double your money.

The only constant in the equation is 72.

For example, if you invest Ksh. 100,000 today at an interest rate of 10%, that amount will most likely be Ksh. 200,000 or thereabouts in 7.2 years (x = 10, y = 7.2; xy = 72).

Similarly, if that rate is 12%, your money will double up in 6yrs using the same formula (x = 12, y = 6; xy = 72)

For investors who do not wish for high exposure to risky investments like stock markets, these returns can still be easily achieved by investing in safe investments like Unit Trusts or even CBK's Treasury Bills or Bonds that give 10% or more in annual returns.

In more developed economies where investors have access to index funds (Dow Jones Industrial Average, S & P 500 etc.), modest returns over time make good investment tools to realize returns in the long run.

Kenya is highly regarded among Africa's financially strong economies with high potential for growth so investments are most likely going to perform better here over time as compared to the country's African peers, in spite of the temporary shocks we usually exhibit from time to time.

A good number of Unit Trusts are currently giving much higher returns on average as compared to T-Bills. The other advantage Unit Trusts have over T-Bills is the entry point; for instance to sign up for Sanlam's Pesa Plus (unit trusts) one only needs a minimum of Ksh. 2,500 for a start. CIC , Amana, Zimele etc. also provide comparatively easy entry and exit requirements on their Unit Trusts products. Treasury Bills, on the other hand, need a minimum of Ksh. 100,000 and one has to open a CDSC account with the Central Bank of Kenya, a factor which in itself provides logistic bottleneck to many small investors.

An ordinary Kenyan investor will most likely double their wealth in lesser time by investing in the stock market, real estate (development) or by investing in similar historically proven investments even with averagely modest growth rates of as low as 15% p.a. Although there have been myths about investing in the stock market in Kenya as is the case in most third world countries, with new advances in financial literacy fronts, this myth is being demystified and many retail investors are turning to stock markets as a source of investment for long term wealth creation.

The rule of 72 is just math, but it's an extremely helpful rule of thumb to put the marathon of investing into perspective. Income earning people need to critically analyze what they use their savings for; it's always better and wiser to use them in ways that allow their money to reach its full potential. If you are the type that keeps money in a savings account at the bank, you will need to wait for at least 72 years for your amount to double. And that is assuming a flat inflation rate of near-zero levels.

In spite of the recently released February data putting inflation at about 9%, Kenya's average inflation rate is about 7%, though this figure is obviously higher since we are a highly consumer-leveraged economy. So to be on the safe side, your returns need to be way above this rate, preferably 14% at least so as to guarantee plausible financial growth. Keeping money in the bank will always make sure your returns are way below inflation rate which by extension indicates a loss of value in your wealth.

With the new banking bill in effect, most commercial banks are expected to give 7% interest return p.a. on bank savings. Safaricom's M-Shwari gives more or less the same rate of 7% annually through its savings plan. Consider Kenya's inflation rate which is at an average 7% p.a. and you realize that by keeping money in the bank, you're essentially getting poorer much faster than the bank account says.

The same vanity of keeping money in a bank's savings account also applies to groupings that engage in the old-fashioned practice of merry-go-rounds. Such schemes ought to be punishable in law since they give the illusion of combating poverty while in reality entraps participants into an arrangement that never grows.

Most merry-go-round pacts have been replaced by a better solution commonly known as Table Banking.

Beyond your emergency fund, you should not put money that you don't plan on using in the near future into a bank savings accounts or merry-go-round scheme since they can't even keep up with inflation.

The beauty of being alive today is that you don't need to work hard to grow your money.

You only need to work smart.

And invest wisely.

Labels: CIC,   SCOM


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