Compounding a Cash Flow

Current cash flows can be moved to the future by compounding the cash flow at the appropriate discount rate.

Future Value of Simple Cash Flow = CFo (1+ r)

where

CFo = Cash Flow now r = Discount rate

Again, the compounding effect increases with both the discount rate and the compounding period.

As the length of the holding period is extended, small differences in discount rates can lead to large differences in future value. In a study of returns on stocks and bonds between 1926 and 1997, Ibbotson and Sinquefield found that stocks on the average made 12.4%, treasury bonds made 5.2%, and treasury bills made 3.6%. Assuming that these returns continue into the future, Table 1 provides the future values of $ 100 invested in each category at the end of a number of holding periods - 1 year, 5 years, 10 years, 20 years, 30 years, and 40 years.

Table 1: Future Values of Investments - Asset Classes

Holding Period

Stocks

T. Bonds

T.Bills

Retirement Planning For The Golden Years

Retirement Planning For The Golden Years

If mutual funds seem boring to you, there are other higher risk investment opportunities in the form of stocks. I seriously recommend studying the market carefully and completely before making the leap into stock trading but this can be quite the short-term quick profit rush that you are looking for if you am willing to risk your retirement investment for the sake of increasing your net worth. If you do choose to invest in the stock market please take the time to learn the proper procedures, the risks, and the process before diving in. If you have a financial planner and you definitely should then he or she may prove to be an exceptional resource when it comes to the practice of 'playing' the stock market.

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