The New NISA “Wasn’t Supposed to Happen! …The “investment insanity” trap perpetuated by the heated NISA press

FSA’s interpretation of “compound interest” is completely out of line.

Let’s return to reality since the conversation has become abstract. In the aforementioned FSA guidebook, there is a sub-heading that reads, “The longer you continue to invest for a longer period of time, the greater the compound interest effect. Then, as a note to the “compound interest effect,” it adds, “*The profit obtained by adding the earnings from investments, deposits, etc., to the initial principal is called ‘compound interest. This is completely out of line.

In fact, prior to this guidebook, the FSA had published an older version called “TOMOTATE NISA Quick Reference Guidebook. In the guidebook, the FSA explained that “if you continue to invest your money without receiving distributions, you can expect to see an amplification effect (compound interest effect) as the profits earned from the investment are further invested. The longer the investment period, the greater the compounding effect,” he explained modestly. This is an expression that leaves room for excuses.

In other words, in anticipation of the new NISA, the FSA has “endorsed” the interpretation that “reinvesting profits earned from investments to earn additional profits” is “compound interest” and the “compound interest effect. (It can be said that the “interest” in compound interest has somehow come to be confused with the “interest” on investment profits, instead of the original “interest” on interest or interest rates.)

Even Einstein is crying behind the grassy knoll!

The “real damage” has already been done. Individuals’ comments on social networking sites on the Internet are rife with misconceptions, such as “the sooner you fill the investment limit of the new NISA, the greater the compounding effect will be,” or “long-term investment will increase the compounding effect. All of these statements are merely stating the obvious: “Reinvesting profits and increasing the amount invested will increase the likelihood of larger future returns. Had they simply said “reinvestment of profits” instead of using the term compound interest, these misconceptions would not have been so widespread.

In investment simulations, Einstein often appears to emphasize the greatness of compound interest. He is often quoted as saying, “Compound interest is the greatest invention of mankind,” but the truth is unknown. Perhaps he never said it, or it was a light-hearted remark (Dr. Einstein was also a bit of a failure to see it). At least during Einstein’s lifetime, there were no index funds. That fact alone shows that seeking compounding effects in mutual funds and stocks is a mistake.

Preparing for Risk is Necessary to Continue Long-Term Investing

Rather than making simulations that are merely wishful thinking, it would be more meaningful to make realistic assumptions, such as “If a 5% loss occurs in the first year, a 5% increase in the second year will not return the principal amount. This is because a preparedness for risk is a “tolerance” in the event of an actual loss.

I have heard from people in the online securities industry that not a few people who attend seminars think that “NISA will give me peace of mind. You will make this much money! It is no wonder that inexperienced investors may be led to believe so by such simulations. There is a possibility that they may stop investing, saying “This is not how it was supposed to be.

As I mentioned at the beginning of this article, the NISA itself is a system created by the government that can be evaluated with open arms. The FSA has done a good job, so there is no need to play tricks on it.