HYIP Insights #11 — Is Compounding a Miracle or a Monster? Part 2

Effect of Interest Rate on Compounding.

In the first part of this article, we first discussed what compounding is and then discussed the difference between full (100%) and partial (less than 100%) compounding.  In each case we took a look at a numerical example.  Finally, we compared the results for full and partial compounding and concluded that, although full compounding has the greatest potential for profit, it is also the most risky way to go and that this is why many investors opt for partial compounding.  We didn’t mention it at the time but partial compounding has a wide variety of possibilities, ranging from almost nothing (less than 25%), to medium (25% to 75%), and to high (greater than 75%).  If you encounter an HYIP that offers compounding, it would be good use of your time to play around with their online calculator to explore the effects of interest rate on future returns.  There are so many possibilities that we can’t possibly do it here. 🙂

Perhaps I should add a note here which is that, the reason we use compounding is to increase our principal.  This implies that programs which offer compounding will also give you the opportunity to withdraw your principal at the end of the investment term.  This is the best of all possible worlds as your principal is growing, which is like a savings account that can be withdrawn whenever you want (or at least at the end of the investment term) and your interest earnings are also increasing, ideally to a point where they can ultimately  provide passive income at the level that you desire (when you stop compounding).  Of course, it IS possible that this might NOT be the case and that your principal might NOT be returned.  In this situation, the investor’s objective would simply be to use compounding until his principal reached a level such that his INTEREST earnings are in line with his financial objectives.  In other words, if your principal is not returned, you only get the second benefit of compounding

OK, moving on to the next item I’d like to discuss, let’s take a look at how different interest rates effect compounding.  It’s kind of obvious that a high interest rate will increase your returns.  But, by how much?  What we will discover is really quite amazing.

Let’s compare three different interest rates for the case of full compounding.  The rates we will choose are 1.4%, 3%, and 8%.  I’ve chosen these rates as we’ll use them in further examples in another part of this article series.  In all cases, we’ll take $1,000 as our initial deposit.  I’m going to show the results for EVERY day — all the way out to the end of the 110 day investment plan.  I’m doing this for a number of reasons that will become apparent when we discuss the table.  Scroll through all this quickly if you don’t like numbers!

In case you’ve forgotten, since we’re compounding 100%, all of our interest earnings are being reinvested, that is, they’re being added to the principal.  For example, in the 1.4% plan, the interest you earn on day 109 is the difference between the principal for day 109 and day 110 (or $64).  For the 3% plan the interest earned on day 109 will be $752 (25,828 – 25,076) — which wouldn’t be a bad daily income.  And, finally, for the 7% plan, the interest earned on day 109 would be $111,668 (1,706,929 – 1,595,261) — which is off the chart!

Obviously, interest is EVERYTHING!  An HYIP that offers you an interest rate in the neighborhood of 1% can probably handle withdrawal of the compounded principal at the completion of the investment term.  My opinion is that it would be difficult (but not impossible) for an HYIP to return the compounded principal at the completion of a plan offering in the neighborhood of 3% interest.  In my opinion (which could be wrong!), plans offering more than this will probably close before the end of the first investment cycle.  I don’t think there is an HYIP anywhere that could pay its members a withdrawal approaching two million dollars — which would be the case with the 8% plan.

The bottom line with respect to interest and compounding is that more is better.  But, the higher you go, the more probable it will become that a program will close its doors before it becomes time for it to pay withdrawals of the highly compounded principals.  So, long term investment in such a program would be extremely risky — even if you, personally, don’t get involved with compounding your investment.

Effect of Time on Compounding.

It is easy to see the effect of time on compounding.  In a word, the longer you let your principal compound, the larger it becomes.  And, the compounding effect starts to really kick in after a while.  This is especially the case with programs that have a high interest rate.  This becomes clear if you look at the numbers toward the end of the table — after around three months (90 days) of activity with the investment plan.  As the days go by at this time, the principal starts to increase at a very rapid rate.  For example, at the end of the 1.4% plan, the daily increase (interest) in principal was $64 which is 6.4% (64/1000 x 100) of your original investment.  In the 3% plan, the increase in principal was 75% (752/1,000 x 100) and, in the 8% plan, the increase was an amazing 11,000% (111,668/1,000 x 100).  However, again the dilemma is that, in order to take advantage of the benefit that compounding for a longer time offers, you have to put your investment at risk for a longer time.  It’s the case of Miracle vs. Monster again…

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