The New NISA “Wasn’t Supposed to Happen! …The “investment insanity” trap perpetuated by the heated NISA press
Compound interest” is irrelevant to investment.
To begin with, compound interest is a method of calculating interest rates or interest. When money is deposited or borrowed, interest accrues on the principal, but with compound interest, interest is incorporated into the principal, and the next interest accrues on the principal that incorporates the interest. Simply put, compound interest is “interest on interest. When interest is not incorporated into the principal, it is called “simple interest. With simple interest, interest does not accrue on interest.
Basically, both compound interest and simple interest are terms used for savings and loans. Bank time deposits can be compounded or simple interest, and a typical mortgage loan is compounded. The reason mortgage balances do not decrease easily is that interest is added to interest.
When calculating interest on financial instruments with compounded or simple interest, there are certain conditions that are assumed. First, the principal must be guaranteed. Second, a predetermined amount of interest must accrue steadily for a certain period of time. Without these conditions, both compound and simple interest calculations are meaningless. Time deposits and mortgages fall under these conditions.
Therefore, compound interest has nothing to do with stocks and mutual funds, which are the investment targets of NISA. This is because there is no guarantee of principal and no pre-determined interest. In other words, the aforementioned simulations are completely meaningless.
The mockery of the expression “compounding effect.”
Some may say, “It is just a simulation, so there is no need to get so worked up about it. However, a series of simulations cannot be dismissed as “theoretical. I sense an “intention” to mislead individuals.
The use of the word “compound interest,” which is used in interest calculations for time deposits and the like, seems to be an attempt to create an image that “investing with NISA will make you more money” than it really is.
There is a reason for such an illusory assumption. In many cases, when explaining asset management simulations, the expression “compound interest effect” is used instead of “compound interest” to refer to “reinvesting profits earned from investments to earn further profits. Probably, since it is an obvious mistake to say “compound interest,” the meaning is made ambiguous so that it can be interpreted as “compound interest effect” = “compound interest-like effect” so that it can be excused later.
Since it is assumed that the FSA understands the true meaning of the term, it is more “malicious” to use a phrase that misleads individuals than to use a phrase that they know nothing about.
