Compound Interest Growth

[JonathanQuick]

And now a question regarding the growth of one dollar at 4% compounded annually, with an unbelievable answer.

If 2000 years ago, your ancestors had invested the current equivalent of $1.00 at 4% compounded annually, what would be the approximate amount of accrued interest? (You may safely disregard the original investment.)

As I recall, this hypothetical appeared in the Wall Street Journal, which claimed that the value, today, would be the entire earth, in solid gold.

"Nonsense," I was certain. Yes it was nonsense. It turns out to be much, much, much more than that. It's more like 12,000 earths made of solid gold.

The point of the article was that you cannot continue to earn substantial returns compounded. Like the grains of corn doubled on each square of a checkerboard, you run out of money.

[The Don]

At 4%, the value would double approximately every 18 years. So yes, you would end up with a stupidly large sum at the end of it all.

And yes, there are hundreds of years in which you wouldn't have achieved a 4% return. Comparing the European Dark Ages or Middle Ages to the current day is clearly nonsensical. For most of the past 2000 years there hasn't been a stable international financial system worth its name.

And yes, a geometric growth over hundreds of years is unfeasible. It is however very feasible to have 4% returns compounded over a lifetime (which after all is what most of us care about).

And yes, the article (which sadly you have not provided a link to) is absolutely right, if you're investing on the 2,000 year timescale then you'll have to expect periods of negative return.

[lionking]

The OP is one of the silliest I've seen for a long, long time. If something impossible had have happened an impossible outcome would have occurred.

Very illuminating.

[timhau]

And yes, the article (which sadly you have not provided a link to) is absolutely right, if you're investing on the 2,000 year timescale then you'll have to expect periods of negative return.

Bollocks. If you're investing on the 2,000 year timescale, you expect to own the planet by the time you're done.

[Francesca R]

The OP is one of the silliest I've seen for a long, long time.Quite--which is why it's best used in parody:

http://forums.randi.org/showthread.php?p=5703641&highlight=quadrillion#post5703641

[drkitten]

And yes, a geometric growth over hundreds of years is unfeasible. It is however very feasible to have 4% returns compounded over a lifetime (which after all is what most of us care about).

Even over a lifetime, as your investment portfolio grows, it gets much harder to maintain the same growth rate. Buffett has written extensively about this.

[JonathanQuick]

The OP is one of the silliest I've seen for a long, long time. If something impossible had have happened an impossible outcome would have occurred.

Very illuminating.

It's called a "hypothetical." It's used all the time, in science, in conversations, even in jokes.

Let's say there was a hypothetical Aussie, who lived in squalor down under, and who knew nothing about finance or investment. The only work he could find was being a clerk at a small market.

A kangaroo hops into the store and asks the clerk, "Have you seen my father?"

The hypothetical Aussie clerk replies, "I don't know, what does he look like?"


TheDon wrote: And yes, the article (which sadly you have not provided a link to) is absolutely right, if you're investing on the 2,000 year timescale then you'll have to expect periods of negative return.

Not in a hypothetical situation you don't. See, we defined it thataway.*

Nor did the WSJ article, written before links, make any mention of "negative return." Because it was all.... hypothetical....

In other words, a mental exercise.

[JonathanQuick]

Bollocks. If you're investing on the 2,000 year timescale, you expect to own the planet by the time you're done.

Bravo, timhau.

There's a man who knows whereof he speaks.

I like you, tim.

But not just ONE planet....

[JonathanQuick]

Quite--which is why it's best used in parody:

//

"The word of a woman. What good is that." - The Dread Pirate Roberts, in The Princess Bride

[Nova Land]

If 2000 years ago, your ancestors had invested the current equivalent of $1.00 at 4% compounded annually, what would be the approximate amount of accrued interest? (You may safely disregard the original investment.)

As I recall, this hypothetical appeared in the Wall Street Journal, which claimed that the value, today, would be the entire earth, in solid gold.


There used to be a cliche in science fiction stories back in the 1940s and 1950s in which a person invests a small sum of money, puts themselves into suspended animation, and awakens in the future extremely wealthy.

Then someone (I forget who) wrote a short story which somewhat destroyed the cliche.

Quick summary: typical person with plan to get rich this way invests their life savings, goes into suspended animation, and awakens a century or three later. Quickly the person finds a phone and makes a call to the bank to see what their bank balance is.

Bank: Your balance is $57,999,431.24.

Person: It worked!

Telephone operator, interrupting: Please deposit $500,000 for the next three minutes, please.

[The True Scotsman]

There used to be a cliche in science fiction stories back in the 1940s and 1950s in which a person invests a small sum of money, puts themselves into suspended animation, and awakens in the future extremely wealthy.

Then someone (I forget who) wrote a short story which somewhat destroyed the cliche.

Quick summary: typical person with plan to get rich this way invests their life savings, goes into suspended animation, and awakens a century or three later. Quickly the person finds a phone and makes a call to the bank to see what their bank balance is.

Bank: Your balance is $57,999,431.24.

Person: It worked!

Telephone operator, interrupting: Please deposit $500,000 for the next three minutes, please.

And there is always the slight possibility of waking up in a communist regime in which money no longer exists. :p

[The Don]

Even over a lifetime, as your investment portfolio grows, it gets much harder to maintain the same growth rate. Buffett has written extensively about this.

That's right, but to maintain 4% (gross) isn't such a big ask especially if we're talking about starting with $1.

$1 invested at 4% compounded will (I think) be about $32 after 90 years

[roger]

Then someone (I forget who) wrote a short story which somewhat destroyed the cliche.

Quick summary: typical person with plan to get rich this way invests their life savings, goes into suspended animation, and awakens a century or three later. Quickly the person finds a phone and makes a call to the bank to see what their bank balance is.

Bank: Your balance is $57,999,431.24.

Person: It worked!

Telephone operator, interrupting: Please deposit $500,000 for the next three minutes, please.
I'm pretty sure that was Asimov.

[Nova Land]

I'm pretty sure that was Asimov.


That would be my first guess. It's the kind of story he very well could have written.

But it could also be someone else. A likely place for the story to appear, and where I most likely read it, is 100 Great Science Fiction Short Short Stories (http://www.iblist.com/book7583.htm). There are several Asimov stories listed, but none of the titles sounds likely to be the story I'm remembering. (Nor can I spot a likely-looking title in this listing of all Asimov's short stories (http://www.asimovonline.com/oldsite/short_fiction_sf_f_index.html).)

Regardless of who wrote it, the basic point is a good one: there are other factors (some known, some unknown) besides simply interest rate which need to be considered.

Suppose that 50 years ago I had $10 in my hand, with a choice of either spending it immediately or investing it at $4% compound interest.

If I'd chosen to spend it immediately, I could have bought 100 comic books and read them till they fell apart. (Or saved them -- but surely they'd have no significant resale value today, so no need to consider that in this little example.)
That would have been satisfying, but -- as someone as wise then as JonathanQuick and WSJ are now would point out -- not very smart. I could instead have put that $10 away at 4% compound interest, postponing immediate reading pleasure for the prospect of being able to buy vastly greater quantities of comics at a future date.

And if I'd been smart enough to do that, I would now have about $71 saved up and be able to buy almost 24 comics (if I stuck to comics with a $2.99 price tag, that is, and bought them while visiting some part of the country which doesn't have the 10% sales tax applicable in my part of Tennessee).

Or, if I'd had less sophisticated reading tastes, I could have bought 40 paperback books (selecting only ones which cost a quarter, a common price then). Today, with my $71, I could buy almost 9 new paperbacks (selecting ones which cost $6.99 -- although I think $7.99 is probably more common than $6.99 these days).

[NewtonTrino]

This reminds me of a friend of mine who put most of his net worth into microsoft stock in the late 90's. He told me it was going to keep on doubling so that he could retire. Lol.

[timhau]

At least Microsoft is still in business, worth roughly half of what it was at the height of the dot-com bubble and even paying a dividend. He could have gone all-in into Enron or into a myriad of dot-coms that either went bankrupt or are now trading in OTC markets at a fraction of one percent of their all-time high.

[elbe]

There used to be a cliche in science fiction stories back in the 1940s and 1950s in which a person invests a small sum of money, puts themselves into suspended animation, and awakens in the future extremely wealthy.

I always wanted to know how someone collects that.
"Yes, sir, that's me. Yep, 2000+ years old and counting. Not a day over 40? Why thank you!"

On a more serious note: What do banks do with old accounts? Like if someone opened an account in the late 19th century and then was, for all intents and purposes, lost afterwords, what happens to his account?

[Roboramma]

I always wanted to know how someone collects that.
"Yes, sir, that's me. Yep, 2000+ years old and counting. Not a day over 40? Why thank you!"

On a more serious note: What do banks do with old accounts? Like if someone opened an account in the late 19th century and then was, for all intents and purposes, lost afterwords, what happens to his account?

I'd imagine that eventually he'd be declared dead and it's managed in a similar way to the rest of his estate.

[The Don]

On a more serious note: What do banks do with old accounts? Like if someone opened an account in the late 19th century and then was, for all intents and purposes, lost afterwords, what happens to his account?

In the UK the account could also be declared dormant and then possibly used to find "big society" http://www.telegraph.co.uk/news/7898746/Dormant-bank-accounts-to-pay-for-Big-Society-projects.html

Bit more info on dormant accounts:

http://news.bbc.co.uk/1/hi/business/4017381.stm

[The Central Scrutinizer]

On a more serious note: What do banks do with old accounts? Like if someone opened an account in the late 19th century and then was, for all intents and purposes, lost afterwords, what happens to his account?

After X number of years (X varies by state, but I think is generally in the 10 year range), it goes to the state. But first the bank has to attempt to notify you, by mail to your last known address, and also publish a notice in a paper of record.

[The Don]

Man, that would be galling if you were awoken from suspended animation only to find that your account was snagged by the state 1990 years ago

[Soapy Sam]

...and your electricity bill for the cryogenics came to £1.7billion.

...which makes me wonder why THEY didn't warm you up a while back...

[Almo]

The story from 100 Great Science Fiction Short Short Stories was different.

He wakes up from suspended animation to find out his fund ran out years ago. They had awakened him to harvest his organs for whoever paid to keep the cryogenic thing running.

[zaphod2016]

This reminds me of a friend of mine who put most of his net worth into microsoft stock in the late 90's. He told me it was going to keep on doubling so that he could retire. Lol.

Had he put that money into Apple (AAPL) instead, his plan might have worked.

/totally regrets not buying stock once the MacBook went Intel. Stupid, stupid, stupid!

[ThermionicScott]

Had he put that money into Apple (AAPL) instead, his plan might have worked.

/totally regrets not buying stock once the MacBook went Intel. Stupid, stupid, stupid!

Hey, it's not too late to buy APP! I just know they're gonna turn that ship around and make me rich. :D

- Scott

[a_unique_person]

That's right, but to maintain 4% (gross) isn't such a big ask especially if we're talking about starting with $1.

$1 invested at 4% compounded will (I think) be about $32 after 90 years

Imagine if you had invested $2 instead.

[dvictr]

On a more serious note: What do banks do with old accounts? Like if someone opened an account in the late 19th century and then was, for all intents and purposes, lost afterwords, what happens to his account?

technically the bank needs to find a decendent/ heir.. but it is known that many of these accounts end up pocketed by the branch manager.

[Brainster]

I always wanted to know how someone collects that.
"Yes, sir, that's me. Yep, 2000+ years old and counting. Not a day over 40? Why thank you!"

On a more serious note: What do banks do with old accounts? Like if someone opened an account in the late 19th century and then was, for all intents and purposes, lost afterwords, what happens to his account?

A nice auditor from the bank sends out emails to random individuals offering to give them 25% of the money if they will just send a couple thousand now to cover various expenses.

[theprestige]

technically the bank needs to find a decendent/ heir.. but it is known that many of these accounts end up pocketed by the branch manager.

Why the branch manager? Which branch? Aren't the accounts managed centrally, for obvious reasons?

[SezMe]

Bulletin!! JonathanQuick discovers that nothing lasts forever! Even at only 4%. Shocking details at 11! Stay tuned .....

[Mr.D]

On a more serious note: What do banks do with old accounts? Like if someone opened an account in the late 19th century and then was, for all intents and purposes, lost afterwords, what happens to his account?

It took a bit of google-fu for the right keywords, but I recalled that one of the local news outlets runs a story on this every few years.

http://unclaimedproperty.hawaii.gov/


What I learned today is that all US states have such a program.

http://www.naupa.org/what/ (http://www.naupa.org/)


PS. "Claims can be made into perpetuity in most cases - even by heirs." If you discover anything, I claim a 5% finders fee! :D

[SezMe]

Earlier this year, on a whim I did a search of the California program with my social security number. Well, I'll be damned, there was a hit ... for about $19. What the hell, I did file a claim. Several months later it was rejected because I didn't have the claim form notarized. So I paid some local schlub to notarized it for me, and there went half my net. Oh, well, I'll have a nice lunch out when it comes. :)

[The Don]

technically the bank needs to find a decendent/ heir..

Would this just be part of the probate process on the death of the account owner

but it is known that many of these accounts end up pocketed by the branch manager.

Are you sure that this is the case ? It's quite an accusation you're making there. theprestige asks whether this kind of thing isn't processed centrally. In my experience in the UK, these things are processed centrally.

[JonathanQuick]

Bulletin!! JonathanQuick discovers that nothing lasts forever! Even at only 4%. Shocking details at 11! Stay tuned .....

Give somebody an interesting observation and what do they do with it?
Laugh.

Turnabout is fair play, SezYou.

"Forever" is a one-word oxymoron. You see, the universe had a beginning.

Oops! Stay tuned. It has an end too. Button up your overcoat. Gonna get real cold.

[drkitten]

Give somebody an interesting observation and what do they do with it?
Laugh.

.... which might suggest that what you find "interesting" is not, in fact, interesting to other people.

If it makes you feel better, we're not laughing with you. We're laughing at you.

[daenku32]

Well, I did some time ago start a thread or at least do a post about how in the macro economic picture, a national retirement system, whether public or private, will have to be tied to the national economic growth rate. Expecting any greater annual returns for the funds as a whole would imply that the total sum of the funds would continue to grow exponentially in relation to the GDP. And not just that, but GDP per capita, since every citizen should be expected to be able to retire with the help of the fund.

If someone ends up earning a greater rate, it's because someone else is earning a substandard or even a negative rate.

[drkitten]

Well, I did some time ago start a thread or at least do a post about how in the macro economic picture, a national retirement system, whether public or private, will have to be tied to the national economic growth rate.

Because, naturally, there's only one country in the world?

[daenku32]

Because, naturally, there's only one country in the world?

Well, are we going to base our retirement on the desire that the people in the other countries don't wish to retire some day? China is rising fast, and I certainly hope that their GDP growth goes into improving the lives of Chinese citizens, not US retirees.

[JohnnyG]

And now a question regarding the growth of one dollar at 4% compounded annually, with an unbelievable answer.

If 2000 years ago, your ancestors had invested the current equivalent of $1.00 at 4% compounded annually, what would be the approximate amount of accrued interest? (You may safely disregard the original investment.)

As I recall, this hypothetical appeared in the Wall Street Journal, which claimed that the value, today, would be the entire earth, in solid gold.

"Nonsense," I was certain. Yes it was nonsense. It turns out to be much, much, much more than that. It's more like 12,000 earths made of solid gold.

The point of the article was that you cannot continue to earn substantial returns compounded. Like the grains of corn doubled on each square of a checkerboard, you run out of money.If you factor in an average annual inflation value of 3% the total is a mere $250 million.

[drkitten]

Well, are we going to base our retirement on the desire that the people in the other countries don't wish to retire some day? China is rising fast, and I certainly hope that their GDP growth goes into improving the lives of Chinese citizens, not US retirees.

Their GDP growth goes into whoever invests in their instruments. Are you suggesting that they shouldn't pay dividends to foreign stockholders?

On a more personal level, my IRA allows me to invest anywhere and in anything I like for retirement. I would be a fool indeed if I decided that because I plan to retire in Springfield, Oregon, I should only invest my money in Springfield, OR.....

.... but by the same token, that's how the Springfield police pension fund should be thinking, too. Invest for maximal returns, not necessarily locally.

[Modified]

Earlier this year, on a whim I did a search of the California program with my social security number. Well, I'll be damned, there was a hit ... for about $19. What the hell, I did file a claim. Several months later it was rejected because I didn't have the claim form notarized. So I paid some local schlub to notarized it for me, and there went half my net. Oh, well, I'll have a nice lunch out when it comes. :)

Assuming you're serious, your bank would have probably notarized it for free.

[Corsair 115]

The OP reminds me of a scene from Futurama where Fry goes to his old bank to find out what happened to the tiny amount of money he had in his account a thousand years earlier—and finds the wonders of compound interest have made him a billionaire. :D

[marting]

Earlier this year, on a whim I did a search of the California program with my social security number. Well, I'll be damned, there was a hit ... for about $19. What the hell, I did file a claim. Several months later it was rejected because I didn't have the claim form notarized. So I paid some local schlub to notarized it for me, and there went half my net. Oh, well, I'll have a nice lunch out when it comes. :)

For small amounts you do not have to have the claim notarized. For large amounts you do. I believe the cutoff is $1,000 above which you have to have it notarized. I've done both. You do have to have some sort of proof such as a copy of your old driver's license that shows you lived at the address of record. I've recovered a lot from CA unclaimed property. Mostly lost deposits or credit cards I lost track of with a balance due.

[ZirconBlue]

For small amounts you do not have to have the claim notarized. For large amounts you do. I believe the cutoff is $1,000 above which you have to have it notarized. I've done both. You do have to have some sort of proof such as a copy of your old driver's license that shows you lived at the address of record. I've recovered a lot from CA unclaimed property. Mostly lost deposits or credit cards I lost track of with a balance due.

In Ohio, anything over $100 requires a notarized signature.