The Laws of the Physics of Investing — Attention Real Estate Investors
Posted @ 9:24 pm - Filed under Check This Out, Retirement Income, Investment Physics
A common mistake is to brush off very simple concepts — because they are — simple. Many consistently commit this mistake with what I’ve called The Laws of the Physics of Investing. 
The problem with that is, the laws don’t care if you believe in them, understand them, or even know of their existence. They just work — every single time they’re tried.
The physics of investing are crucial to the success of any retirement plan. In most ways they’re no different than the laws of physics we learned in school.
For instance, jump off a cliff, and you’ll fall down every single time. That’s gravity. It’s absolutely reliable — every single time. There are no exceptions. You will never, for any reason fall up instead of down. Knowing this is true, you can choose to apply gravity to your benefit, or ignore it at your peril.
Let’s take a look at one law of the Physics of Investing.
Investment income, no matter how simple or sophisticated the investment vehicle, is always a result of the same process.
An amount of capital is invested at a known, or at least hoped for yield. That yield is expressed in terms of a percentage. If for example, you put $100 in your bank at a 2% annual yield, your ‘investment income‘ will be $2. On the other hand, if you had deposited $1,000,000 — your income would instead be $20,000.
Same 2%. Remember, I said it was sometimes very simple.
LAW: The amount of investment income, all things being equal, is dictated by the amount of capital invested.
I know, I know — Duh. Where’s Captain Obvious when you need him, right?
Stick with me a bit.
All retirement income is about, is a yield on whatever capital you bring with you at the point of your retirement. Whatever rate your capital will command at that time will be what it will be. You won’t be able to control it.
You can control, however, how much capital you have at that point. That amount will, as I said earlier, determine what your monthly retirement income will be — for the rest of your life.
That amount will be larger or smaller in direct proportion to the wisdom of the investment decisions you made for the 2-4 decades preceding your retirement.
Capital multiplied by % of return = retirement income. How much capital will you have created when it’s time for you to retire?
What have you been doing to grow your capital the last 10 years? How’s it been working for you lately? Are you satisfied with how your decisions have turned out the last decade or so?
The Law Says: The bigger the bag of gold — the more impressive the yield retirement income.
It’s a law you can’t change. You can only choose to use it to your advantage — or not.
This entry was posted on Wednesday, September 12th, 2007 at 9:24 pm and is filed under Check This Out, Retirement Income, Investment Physics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
