Have your best interest in mind

IN the face of the rising cost of living and currency depreciation risks, investors are seeking strategies to protect their purchasing power.

To combat these risks, a right mix of investment strategies may be employed to accelerate returns.

However, many still lack understanding of essential investment principles or how to apply the correct tools to meet their investment objectives.

One of the most misunderstood and often misapplied principles is compounding, which is capable of creating the best advantage in meeting your financial goals.

To appreciate the power of compound interest, you should understand how simple interest works.

When you make an investment, the amount of money paid is called the principal and any investment that pays simple interest calculates payments based only on the principal.

An investment of RM10,000 principal that pays 10% simple interest means your investment earns on 10% of the principal, therefore generating RM1,000 annually.

This means that your investment will come up to RM11,000 at the end of the first year, RM12,000 after the second year, RM13,000 in the third year and so forth.

Investments with compound interest work differently. They pay a fixed percentage, 10% yearly in this example, on the entire balance accumulated. In other words, you earn interest on both the principal and the interest.

Compared with the earlier example of the simple interest investment, the investment with compound interest will give you RM11,000, RM12,100 and RM13,310 at the end of the first, second and third year respectively.

“Compounding is the greatest asset to grow your egg nest,” says William Ng ( pic), chief executive officer of TFDC Asiacorp Berhad, who is also a Certified Financial Planner and Islamic Financial Planner.

Simply stated, compounding is the idea of earning interest on interest. As the interest grows, the interest on the interest grows.

At some point the interest- oninterest portion becomes bigger than the initial investment.

Similar to a snowball rolling downhill, the more times goes by, the bigger the interest- on- interest portion becomes. Hence, compounding can be seen as an accelerating force to grow your investment.

The understanding of compounding and its application allows you to leverage on its acceleration power to help realise your financial goals, particularly if your objective is to plan for your retirement.

However, not all types of investments are inherently structured to facilitate the effective application of compounding.

For example, in a stock market where pendulum swings of equal size occur, investing RM10,000 will allow you to earn 10% in the first year but lose 10% in the second year, meaning you will not break even and may end up with RM9,900, a loss of 1% of your principal.

“The key to successful application of compounding is to seek investments that grow the principal sum and interest over time,” says Ng.

Therefore, investments that are structurally suitable to optimise the application of compounding are those that provide autoreinvestments of the returns along with the principal, or those that provide the short- to- medium payback of the capital and returns, hence providing reinvestment options.

TFDC Asiacorp is a boutique property development investment firm that promotes property bonds and luxury community properties in Forest Lakes Country Club, Halifax, Canada.

The company is a subsidiary of Terra Firma Development Corporation Limited, Canada, which is the master developer for Forest Lakes.

TFDC Asiacorp promotes structured investments and lifestyle properties to grow wealth using a mix of compounding, global diversification, and inflation and risk control applications.

TFDC Asiacorp conducts regular investment seminars and financial talks. Its next event will be held on Aug 9 at the One World Hotel, Petaling Jaya. Registration is required.

For more information,

call 011- 1222 1998.