Many schoolchildren have difficulty understanding the principle of compound interest: how money left in an interest bearing account for long periods of time can increase exponentially.It strikes me that the news item about George Washington’s library fine would be a great example to illustrate the principle of compounding. Our first president, who died in December 1799, borrowed two books from what was then the only library in Manhattan . The two books were “Law of Nations,” a dissertation on international relations, and a volume of debate transcripts from Britain’s House of Commons.Neither book was ever returned and if the library fines and the accruing interest are totalled up , they would amount to a whopping $ 300,000.Wouldn’t that be an effective illustration ?
Figures , like everything else, can be misused and they often are. A financial advisor trying to sell me an annuity was making the point that the stock market over time was the best possible investment. He pulled out some charts to show that $ 10,000 invested in the stock market in 1928 would have grown to over a million dollars by now , providing the interest and dividends were re-invested. His charts also showed that nothing else ( not SB accounts, not CDs, not treasuries) would grow to even one-third as much. The charts were very impressive and $1,000,000 had a nice ring to it but he neglected to mention two important facts. One was that his figures did not take into account the taxes that would have to be paid through the years and which would significantly reduce the accrual. The other is that hardly anyone can think of leaving money in the market for such long periods of time. When one is looking at shorter timelines of even 10, 15 or 20 years , the numbers are much reduced and a lot depends on the timing of the initial investment. I met with him in 2007 just before the market tanked. If I had taken his advice and invested then , my account would have been lost about 30% by now.
What was it that some one said. ” There’s lies, there’s damn lies and there’s statistics.”