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Title: Investing; alt-text: But Einstein said it was the most powerful force in the universe, and I take all my investment advice from flippant remarks by theoretical physicists making small talk at parties.
Oh look, another strip where Randall invents a false target and then attacks it for the sake of humor. Humor that - it's worth noting - would not exist if he was being honest in his subject matter.
Let's start with the obvious. 2% interest may not seem like a lot because it's NOT a lot. 2% is what you get if you put your money in a savings account. It's what a bank guarantees you for letting them hang on to your money. 2% is NOT investing. Furthermore, decent investments are going to be maturing for a lot longer than 10 years. If you have a low principle, a low interest rate, and a low time frame, of COURSE you're going to get a low return!
If we're being realistic, an investment is something that you're going to let grow for several decades, and you're going to get an average rate of return much higher than 2%. I'm no financial expert, but I understand that decent investments return around 8%, and great ones return 12%. Those numbers may be off (feel free to correct me in the comments), but it doesn't matter; my example is going to be much lower.
(All results are done here with a starting principle of 1000, no annual addition, and annual compounding.)
So, we start with our 1,000 dollars. I'm 23 years old; let's say I want to retire at 63. This money will be compounding interest for 40 years. At just a 4% return, that 1,000 dollars turns into 4,800 dollars. At 5% it becomes 7,040 dollars. At 6% it's at 10,285 dollars. See that? Even at below average interest rates, a principle as low as 1,000 dollars will increase tenfold if given the time.
Compounding interest isn't magical. No one said it was. But, under the right conditions, and given the right amount of time, it will offer a dramatic return on the original principle.
So why am I making such a big deal about this? Why am I running numbers that you guys probably already know about? Well, quite simply, it pains me that a webcomic about "math" can so callously disregard such an important application of it. It feels like Randall is saying, "Compound interest? Eh, it's basically meaningless." It's not! Compound interest is a big deal, and it should be treated as such!
What's happening to you, Randall? Why don't you like math anymore?
P.S. The xkcd forums are filled with people pointing out the flaws in the comic (low interest rate, etc.) Interestingly, the number that's in the strip right now for the result ($1,279) is wrong. No one can reach that answer no matter how they come at it. I've saved the image for now, as I expect that Randall will sneakily update it once he sees the flaw.
Even in xkcd-sucks' short history, I find it hard to believe this is only the first comic to use a straw man attack. You might want to apply the tag retroactively.
ReplyDeleteI think I prefer this hate-blog over the other well known one from now on. This blog at least succeeds to properly link the comic.
ReplyDeleteI think I'm actually going to rename the tag "misleading premise." And yes, a lot of strips need it.
ReplyDeleteIt's misleading to talk about what compound interest gives you without talking about the portion given by non-compounding interest.
ReplyDeleteNumbers with $1000 for 40 years:
4% - $1000 principle, $1600 regular interest, $2200 compound interest, $4800 total
5% - $1000 principle, $2000 regular interest, $4040 compound interest, $7040 total
6% - $1000 principle, $2400 regular interest, $6885 compound interest, $10285 total
And with Randal's example of $1000 for 10 years at 2%, $200 of that is regular interest, which would make $79 of it from compounding if anybody knew where he got his numbers from.
Wow.
ReplyDeleteThe most famous novel in my country's history (Max Havelaar, written in 1860) was devoted to mocking people like you, and exposing the danger they pose to the world.
Now, before you extensively research the author's credibility, and write a long essay about it: sure, the guy's views were severely tainted by consistent personal failure in all sorts of ways. But he damn well knew how to write, and how to be funny, how to satirize those of us who lack any sense of humor whatsoever. And so does Randall.
At the very least, read chapter 1, if you get the chance.
Dear Reineirpost,
ReplyDeleteI read Max Havelaar four times, it does not saying anything at all about internet criticism. Sorry...
This sounded like a good comic to do the hit-all-boxes thing on, but alas I was foiled by jet lag. Pity.
ReplyDeletefeel free to correct me in the comments
ReplyDeleteOk. It's "principal", not "principle".
reinerpost, I read the Wikipedia entry on Max Havelaar and it sounds like you don't understand the novel at all.
ReplyDeleteDear Reinierpost,
ReplyDeleteIt is me again, Anonymous 5:00. I do still not understand the similarities between Multatuli (Edouard Douwes Dekker), who wrote a sometimes funny, sometimes witty, sometimes satirical, and overall extremely well written book that is an indictment against the exploitation of Java and its inhabitants by the Dutch colonial authorities, and Randall Munroe, who creates a badly drawn, almost never funny, hardly witty and extremely badly written web-comic that cannot be considered as an indictment against anything at all (except for perhaps good taste).
Multatuli wrote from personal experience and failure, yes, he had seen it all. That is what makes Max Havelaar so good. Randall Munroe has not experienced anything significant at all in his life, that is what makes XKCD so boring/mediocre.
Gamer_2k4 is right when he points out the mediocrity or suckiness of Randall's works. Next time you come over here to troll and offend my favourite books, Reinierpost, try to it a little bit better.
Kind regards,
"Gamer_2k4 is right when he points out the mediocrity or suckiness of Randall's works. Next time you come over here to troll and offend my favourite books, Reinierpost, try to it a little bit better."
ReplyDeleteHaving read none of the book or wikipedia entry in question but having worked in tech support long enough to have developed Internet ESP I believe Reinierpost is actually trying to imply that Gamer_2k4 is exploiting Randall's "hard work" without having done any "hard work" himself. Profiting from other peoples' jealous hatred of his success.
Thank God, you put hard work into quotes, SinbadEV
ReplyDeleteOk. It's "principal", not "principle".
ReplyDeleteAh shoot, and I know that, too. That's what I get for doing these at 3 in the morning.
Gee, would you look at that, Randy changed the number.
ReplyDeleteIndeed he did. I'll post the original strip when I get home today.
ReplyDeleteI'm going to be fair to Randall and assume that the 7 was actually a really badly drawn 1 that he has since corrected.
ReplyDeleteStill a terrible comic.
Funny story: yesterday I accidentally permanently deleted about 6 items from my desktop (dunno how they got selected), and the original strip was one of them.
ReplyDeleteHowever, you'll have to take my word for it that it was quite clearly a 7, and the fact that Randall's 1s are straight lines casts doubt on the possibility of the error being the result of bad handwriting.
That is not a funny story. That is outrageous. You'll need to be more careful in the future if you want to rule the world of xkcd criticism.
ReplyDelete"Fun" Facts I came up with when trying to come up with a better Alt-Text:
ReplyDeleteThere is no evidence to support the claim that Einstein said that thing about compound interest being the most powerful force in the universe... in fact, given that the term "compound interest" wasn't popularized until after Einstein died it is rather unlikely... He is also (unverifiably) credited with discovering the "Rule of 72" (If you divide the number 72 by the rate of annually compounded interest (in percent) you will get the number of years it would take to double your investment. So, because 72/2=36, it would take 36 years to double your investment at 2% compound rather than the 50 it would take if the 2% was only applied to the principal.)