We at ABJ always keep emphasizing the long term investment by showing its benefits through different real life examples. Previously we explained how long term investment can give huge returns in biological way through bamboo tree example. In this writing we are trying to explain how small investments can deliver big returns because of long term investments  explained through simple physics.

Archimedes spoke, in relation to the lever, give me a place to stand on, and I will move the Earth. A lever strengthens an input force to provide a greater output force. The ratio of the output force to the input force is the mechanical advantage of the lever. People can reduce the amount of effort that is needed to lift and move things by using levers and pulleys. The load is located at one end of the lever, while the effort is applied from the other end. The relative distances of the load end and effort end from the fulcrum gives us the mechanical advantage of the lever. If the fulcrum is placed under the center of the level, the power on both ends must be identical. However, if you move the fulcrum much closer to the heavier object, you can achieve the desired result with less force, notwithstanding longer movement, so you don’t actually conserve on the work you do. The closer the fulcrum is to the load end (as compared to the effort end), the lesser effort is required.

Now connecting it with our Financial world, to get our desired monetary Goals (Load) from our available money (Effort), we invest in securities (beam). Now according to science the closer the fulcrum is to the load end (as compared to the effort end), the lesser effort is required. So keep your target time (fulcrum)  away from investment point and you need to put the lesser investment amount to get the even bigger goals.

Now coming out of the science world, let’s see below table of how returns of just 15 % has converted Rs. 5,000 in to 1.9 crores in 25 years.

Now you must be wandering fine with less effort even heavy weight can be lifted  easily with lever and pulley and even more weight can be lifted if fulcrum placed near target  in science but how it happens in investment world?? Which force is acting behind it??

In finance this affect comes with long term investment due to power of compounding. Compounding means your returns earned is also added up in original investment amount to earn more returns. So if you don’t withdraw your returns or capital invested from original investment and let it multiply for long term then your returns and initial investment will sum up to give you huge returns.

Let’s understand it deeply, this is the formula of calculating goal amount from investment amount.

A = P (1+r/100)^t

A= Goal Amount

P= Principal Amount (Initial investment)

R= Rate of Returns

t=  Time Horizon

Now here t (Time Horizon) is given additional power by writing it in power, it is not used in multiplication, this is the power of time horizon. So each year makes huge difference.  The sad point in investment is, people focus on R (Rate of Returns) and P (Initial investment) no one focuses on T. Everyone is looking for more returns and no one wants to give time to their investments. Everyone want to get rich quickly, but more the “R” % returns you want, higher will be the associated risk. People is not having the risk bearing capacity and they want higher returns. They are not having huge initial investment capacity so they think let’s take more risk and get the higher returns But no need to do so you can still achieve your big goals with lesser risk and even with small investments, if you are ready to give time to your investments.

Above formula gives us three clear way to Make big money through investments first one is the money you are ready to investment i.e. your investment money. The second  is rate of returns and the third if investment time frame. Now the choice is yours which one you want to opt.

Now the good plan is to achieve best returns by balancing all three. Let’s discuss all the three factors in details.

1st: Principal amount . Now here we have two options 1st : Lump Sum investment and second is SIP i.e. If you have good initial investment then fine but if you don’t have big money to invest now then so Systematic investment plan , Now SIP doesn’t mean Mutual fund you can invest your funds yourself or through professional in installments instead of investing it one shot by saving 10-15% of your income that would reduce your risk even. When these small investment would grown big you will be surprised. You don’t need to borrow to invest .

People are borrowing and trading in stock market to get big returns. You just need to control your expenditure and save little more to invest it in proper investment avenue.  The secret to increasing your savings  for investments is to pay yourself first.  Put the money into a designated savings account before you pay anything else. Rather than trying to save the money that remains at the end of the month, put it away first before it gets eaten up by other expenses . Make it habit, include savings as part of your spending plan. Use your online banking resources to set up auto deposit from checking into your savings account.

2nd: Second factor is rate of returns, returns are directly corelated with the security you are investing. Stock market gives better returns than bank deposits or government securities but risk associated with it is also high. You can invest in best stocks to buy to get the best returns. There are different categories of best stocks you can invest wither in growth stocks or value stocks. Value stocks generally has high margin of safety and so less risky , growth stocks are comparatively riskier.

3rd : Now the third factor is time frame, invest for long term in stocks and get the best returns with lower risk as risk is reduced in long term investment. Long term reduces the volatility of the security and so the associated risk of it.  There are many successful long term investors the most well-known and third richest person is Warren Buffet , he has made high wealth through long term investments with the CAGR of just 21%, yes just 21%.

So invest systematically for long term in good returns providing securities with calculated risk.