102 ShowMetheMoney
compoun drate of return of 9% doubles approximately every 8 years,
at age 57 she’ dnee dto have $500,000; at age 49 she’ dnee dto have
$250,000; at age 41 she’ dnee dto have $125,000; at age 33 she’ d
nee dto have $62,500; an dto day, at age 25, she’ dnee dto have (only)
$31,250!
If this illustrates the joy in compounding, take another use of
the rule of 72s to illustrate the joy of slightly higher rates of return.
Assume that instea dof being able to earn about a 9% rate of return
over the next 40 years, our 25-year-ol dcan only reasonably expect a
6% rate of return. Now her money will double approximately only
every 12 years rather than every 8. So 12 years hence at age 37 she’d
have $62,500; at age 49 she’ dhave $125,000; at age 61 she’ dhave
$250,000; at age 73 she’ dhave $500,000; an dshe’ dhave to reach
the ripe age of 85 to en dup with a million!
Interest Rates
A subtle but most important lesson of the apple tree parable is the
pivotal role interest rates play in the value of assets. The ol dman
mentione dthat U.S. Treasury instruments provi de a risk-free rate of
interest. That benchmark interest rate is a major determinant of the
value of any other asset in the economy, including the value of whole
businesses an dshares of stock in them. The risk-free rate sets the
standard of value of assets with risk. The higher the risk-free rate,
the lower the values of riskier assets; the lower the risk-free rate, the
higher the values of riskier assets.
As Warren Buffett reflecte din a rare public commentary pre-
pare dforFortuneby Carol Loomis, when the risk-free rate was very
high in the late 1960s an d1970s, for example, the average price of
stocks was depressed.^2 The Dow hardly moved an inch in price from
the early 1960s to the late 1970s because for investors to buy stocks,
they ha dto get a return that excee de dthe sky-high risk-free interest
rate. When the risk-free rate was very low from the mid-1980s to the
early 2000s, in contrast, average stock prices shot up. The Dow en-
joye dthe greatest bull market in history because the risk-free rate
was so low that it was relatively easy for investors to get a risk pre-
mium (returns above the risk-free rate).
Taxes
The only thing more mind-boggling about amateur day trading than
the outright losses that are racke dup is how many among the tra ding