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The Importance of Investing in Instruments With Higher Rates of Return

In any wealth accumulation endeavor, three elements need to be present for you to grow your wealth.

More capital: First, the larger your initial capital, the greater your wealth.

More Years/Time: Second, the earlier you invest, and hence the more time given for your investment to grow exponentially, the greater your wealth.

Higher Rate of Returns (ROR): Third, the higher the rate of returns, the greater your wealth.

The concept above can be conceptualized into a simplified formula as follows:

Capital X (1+ROR^Years) = Your Wealth

Note that this is only a simplified formula used to explain the concept illustrated above. It neglects to discuss the impact of monthly or yearly payments which are also essential elements in the calculation (for example if you increase your capital for investments on a monthly or yearly basis because you save and invest every month or year).

Therefore, step 3 in this formula is needed to address the importance of having higher rate of returns. Generally, if all other variables were to remain constant (e.g. your capital and the number of years you hold your investment remain unchanged), it is better to subject your investments to a 10% compounded rate of return, versus a 5% compounded rate of return.

With this in mind, it is imperative that you do your research on what funds can give you a higher rate of return. For myself, apart from investments made in growth stocks, I also invest in Exchange Traded Funds (ETFs) that mirrors the performance of the Dow Jones Index and the Standard & Poor (S&P) 500 Index. I also invest a portion of my wealth in hedge funds (but do note that hedge funds are not for everyone, and not all hedge funds perform, another topic for another day).

Conclusion

After reading numerous books on wealth creation and personal finance, I have presented a simplified but essential concept on how you can build abundant wealth. Hopefully, this article can kickstart your journey toward a wealthy life with abundance of joy!

Important Notice

Do note that this article only seeks to illustrate a financial concept toward wealth creation and accumulation, and do not constitute an article for investment advice. This article also neglects to discuss the wealth management cycle that corresponds with the different priorities of individuals as they progress with the different stages of their live cycle. Please approach your investment advisor or financial planner for more information.

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