Snowballing Investing 101
Snowballing is a process where an event rapidly gets out of control. The term originated from the way a snowball continues to get larger and larger as it descends downhill. Snowballing investing is a process where capital invested over time creates a vicious cycle of investment and return leading to a ballooning portfolio with a decent return and minimal risk.
For starters, we will consider an investment in a 91 day treasury bill issued by the Kenyan government over a period of 10 years. I had highlighted earlier on how to invest in a treasury bill.
The following will be the assumptions of the investment:
- We will use an average rate of return of 10% over the 10 year period though Treasury bill interest rates usually fluctuate depending on government demand for cash. The 10% rate was arrived at from calculating the average rate of return for the 91 day Treasury bill over the last 10 years which was 10.285%.
- We will assume that the investor invests Kenya shillings 100,000 every six months for the first 5 years and also that he/she reinvests interest earned.
The above investment would yield the following return after 10 years.
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Total amount invested: 1,000,000 (You would be investing 100,000 every 6 months for 5 years)
Total interest earned : 1,087,329.59
Tax paid : 163,099.44
Amount after 10 years: 1,924,230.15
Notice that the interest of 1,087,329.59 earned over the 10 year period has surpassed the invested amount of 1,000,000.
This investment has several benefits and also draws backs which I will state to help you understand the level of commitment and discipline required for such an endeavor.
- The investment is risk free hence you are 100% guaranteed to get a return.
- You would have managed to save 1,000,000 shillings over a 5 year period.
- You would have about 2,000,000 shillings after the 10 year period.
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- Saving is not easy; it would require a great deal of sacrifice and commitment to carry out this investment.
- Your money would be earning a lower return compared to other conventional investments since the return is risk free.
After analysis of the benefits and drawbacks, I can strongly advise anyone who has some disposable income and no other investment idea at the moment to consider this snow balling investment idea. One can always opt to get out before the ten year period if necessary but your money would be safely earning you an interest as you await better investment opportunities.
I end this discussion with Albert Einstein quote to encourage you on the idea:
“Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn’t … pays it”