[extropy-chat] who wants to be a millionaire?

[BillK]

On Wed May 12 16:45:49 MDT 2004 Damien Broderick wrote:
> But if *everyone* is a millionaire, or a multi-millionaire, what are 
> a few million worth? A painting was sold the other day for $140
> million. A hundred years ago you could own or endow a large chunk of
> America for that.

This is the point about inflation devaluing the currency.
I remember going on holiday to Yugoslavia and being a dinar millionaire,
or going to Italy and being a lira millionaire. In times of inflation
you need investments that are backed by 'real' assets. At present in the
UK everyone is buying real estate, because property has been going up by
about 20% pa - but of course it won't go on like that for ever.

If price inflation is averaging 3% and you get 3% pa interest net on
your $5,000 then in 180 years you are a millionaire but your million is
still only worth $5,000 in real terms.

But Robert was talking about interest rates *above* the inflation rate.
That's why I claimed that his 6% rate was too high for the real world.

To continue the example, if you can get a secure investment paying 5% pa
*after tax and expenses* then you would be earning 2% above the average
inflation rate.
This would make you a real millionaire in 'only' 268 years.

One reason why people don't do this is because it is incredibly boring.
Warren Buffett was criticised all through the tech boom for being too
boring and traditional. But he stuck it out and is now quietly smiling.

The other reason is that nothing much happens for a long, long time. The
initial growth of your investment is tiny. All the big growth comes in
the last few years. In the 2% example, after 40 years the $5,000 is
still only worth $11,000 in real terms.

This is why if you are trying to build a pension fund you not only have
to start with $5,000 but you have to add another $5,000 every year. This
saving method gets you to $319,000 after 40 years and your investment
is starting to get exciting.  (If you are an actuary, that is. :)  )

BillK