When I was 13, my maths teacher taught us about compound interest with the following equation:
P = A x (1+R)n
P = Total of initial capital and profit (£)
A = Starting amount (£)
R = interest rate
n = number of years
As an example, if I invested £1000 in a tax-free savings bond for 5 years, with a 3.5% yearly interest rate, then the return on that investment after 5 years would be:
P = £1000 x (1+0.035)5 ~ £1187
So now what? What does this have to do with shares? From the numerous trades I’ve given in this series of blogs, it is possible to make repeatable returns of at least 5% profit on short term trades using small amounts of capital. In an ideal world, you could begin with an amount of capital (A), reach a target % profit level per trade (R), and then reinvest capital and profit after every trade for ‘n’ trades to reach the ultimate goal. So think of a number....I’ll think of a number....a million. Now if I only had a starting amount of £3000, and wanted to keep to a low profit target of 2% per trade, then rearranging the following equation to get ‘n’:
£1,000,000 = £3000 x (1+0.02)n
..means that I would need to make 294 successive successful trades to exceed the £1,000,000 target.
At first sight this seems quite achievable, but in reality it is hampered by all the risks associated with investing. But all is NOT lost – my main portfolio is now underway in a mission in which I have set up target levels starting from £1000, using a 1.742% profit level, which will require 400 levels to get from £1000 to £1,000,000. All I have done here is to set up the target levels – the amount of capital I choose to use in order to reach the next target can be any amount I’m comfortable with for a particular company, but all I’m looking for is to clear the next level. The thing I’m doing differently here though is that the value of the profit is being kept as a ‘freeholding’ of shares so that if the price (and value) of the freehold increases in the future, then that future increased value may be enough to clear another level without me having to make any more effort in seeking out a new investment, so it will be old profit clearing new levels. Obviously the value of my freehold could drop too, but this is where I have to be sensible about it and focus on less risky shares to invest in where the upside is present such that any freehold shares has a good chance of seeing further gains. Obviously there will also be a point in time when on the longer term, a price may become extremely overbought such that it would be prudent for me to sell the remaining freehold entirely, especially if a number of levels had been cleared through any increasing value of the freehold. This scheme should provide a slow growth strategy, but with the liquidity reserved such that only the smallest amount of capital will hopefully be used in order to clear each level.
The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.
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