In Part 2 of this article, we discussed both the influence of interest rate and the length of the investment term on the profitability of compounding. There were really no surprises in that, the higher the interest rate and the longer the term, the more lucrative compounding can be. What might have been a surprise is just HOW lucrative compounding can be. This is the reason that most HYIPs are careful about the interest rate they offer if they are also offering automatic compounding. They might also limit the term of an investment plan in a similar attempt to limit the profitability of compounding.
However, as you probably already know, compounding doesn’t have to be automatic in order for you to compound — and for as long as you like. The definition of compounding is simply to reinvest your earnings. So, that’s all you have to do in order to compound on your own. The only advantage to automatic compounding is that it is done instantly; the minute you have interest earnings, they are reinvested into your account. On a personal level, it is impossible to do this. Who can monitor their account 24/7? However, it’s possible to do a pretty good job at this and to build up your principal to the desired amount almost as quickly as when the compounding is automatic. And, obviously, you can compound partially just as easily. For example, instead of reinvesting all of your interest earnings when they are posted, you might choose to reinvest half of them and withdraw half.
Online Programs that Offer Automatic Compounding.
Roughly a month ago, an HYIP that I expected to last a long long time suddenly closed its doors. This was SportArb. Even though the program is gone, it might be somewhat educational to read our review of it as it refers to the automatic compounding feature that the program offered (you can read the review here). SportArb offered six different investment plans and paid investors a percent of the company profits that depended on the size of a person’s investment. Specifically, their “Basic” plan paid 70% of SportArb’s profits on a daily basis and expired after 60 days (at which time your principal would be returned to you). Of course, knowing what we know now, it would be a simple matter to reinvest your compounded principal at the end of the 60 day period in order to double the length of the term — and so on for as long as you like and for as long as you care to risk your money. Typically, SportArb made around 2% profit per day. So, if they paid you 70% of this, your daily interest would come to 1.4% (2 x .7).
This is one of the interest rates that we examined in Part 2 of this article. You might want to refer back to the chart showing growth of principal for three different interest rates. For our purposes here, what is important is the principal at the end of the investment term. The chart used 110 days which is close enough for us to get a good idea of how this works. In that time period, we found out that, using 100% compounding, a deposit of $1,000 would grow to $4,615. This is certainly acceptable growth in three or four month’s time.
As an aside, over five years ago I made a good deal of money investing in an online HYIP called GoldNugget. They were supposedly involved with the same business that SportArb was involved with — arbitrage betting on sporting events. Being a bit of a mathematician, this struck me as a plausible method for a company to use to earn lots of money. I might have been correct as the company did survive for quite a long time. Well, I suspected that SportArb might be the same great deal and came very close to investing a sizable (for me!) amount of money in this program shortly after we reviewed it. My plan was to let the deposit compound for one 60 day term and then to reinvest my compounded principal and withdraw the interest earnings on a daily basis. Fortunately, I didn’t do this as I would have lost everything! I mention all this as an example of the thought process that a person might go through in deciding how to manage his investment. Now, even though I fortunately didn’t make this investment, I would probably not opt for 100% compounding. For me (and this is a very personal thing) the risk is too great as you simply cannot predict what will be the fate of an HYIP — no matter how good it appears to be.
But back to our discussion…
Right now there is a program that, like SportArb, offers automatic compounding. This program is called AurumBank (reviewed here) and they refer to automatic compounding as “Plowback”. Also like SportArb, you can select the amount of compounding that you would like to use. A very nice thing about the AurumBank website is its clarity. They offer a lot of investment plans (25 of them!). But, they are all neatly categorized, and when you go to the details of a plan, there is a simple online calculator that will calculate your return for whatever compounding rate you might choose. Many of the plans are beyond the reach of the typical online investor. However, four or five of them are certainly doable. Two such plans for which compounding is available are what they refer to as Stable Plan #1 and Premium Plan #1. Both of these plans have terms of 110 days with the Stable plan offering a daily interest rate of 3% and the Premium plan offering 8%.
As you might have noticed, these are the other two interest rates we examined in Part 2 of this article. Using 100% compounding, both of them provide amazing returns at the end of the 110 day term. Referring to the chart, the Stable plan will pay you $25,828 and the Premium plan will pay you $1,706,929. These are the same numbers that the online calculators in the AurumBank website come up with. While it might be possible for AurumBank to pay the return predicted for the Stable plan, I don’t think there is even the slightest chance that it can pay the return predicted for the Premium plan. I feel this is very unfortunate as, if someone did indeed make a $1,000 investment in one of these plans (especially the Premium plan), the company would have no choice other than to shut its doors. AurumBank has been around for over two years and I sincerely hope that they will straighten this out while it is still possible. It would be wonderful if they were around for many more years to come. I should note that I might be completely wrong on this. If, indeed, ArumBank could come through with this level of payment, the company would be famous in the HYIP industry for years to come! 🙂
All this said, you now have an idea of what online programs that have automatic compounding look like. On the plus side, they generally appear to be very understandable from a technical point of view. Both SportArb and AurumBank had/have very nice calculators that precisely predict your return for whatever compounding rate you might choose. Alas, the dilemma always comes down to imprecise subjective judgments. SportArb failed prematurely apparently due to non-technical problems beyond their control. In the case of AurumBank, we have to ask ourselves whether they are setting themselves up for failure as well. Or, is the company just hoping that investors will never choose the compounding option offered on their website?
This is the end of this rather long-winded article. I hope that it has offered you some “insights” as to how the compounding process works…
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