My Question To ChatGPT
Give me an example of compound interest, assuming I make an investment earning me 2% per day and compounding daily. What would be the minimum invested needed to make a million dollars and how long would it take.
The Reply
Let’s break this down step by step to find out how much you need to invest to reach $1,000,000 with 2% interest compounding daily.
Compound Interest Formula
The formula for compound interest is:
A=P(1+rn)ntA = P \left(1 + \frac{r}{n}\right)^{nt}A=P(1+nr)nt
Where:
- A is the amount of money accumulated after ttt days, including interest.
- PPP is the principal (initial investment).
- rrr is the daily interest rate (2% = 0.02).
- nnn is the number of times interest is compounded per period (daily = 1).
- ttt is the number of days.
We want to find:
- The initial investment (PPP) that will grow to $1,000,000.
- The time (ttt) it will take.
I’ll calculate this for you!
If you invest $100, it will take approximately 465 days to grow to $1,000,000 at 2% interest compounded daily.
To reach $1,000,000 in 365 days (1 year), you would need to invest at least $726.00 initially.
Let me know if you’d like to adjust the timeframe or the interest rate!
My Response:
If this is so why are we not all millionaires, there are thousands of short term investment companies out there offering packages from 1 to 2% Daily on a $100 packages. Can you give a full explanation on this.
ChatGPT Reply
The promise of 1-2% daily returns seems incredibly enticing, and based on the math I just showed, it might appear as though anyone could quickly become a millionaire with a small investment. However, in reality, there are several important factors that explain why such investments often don’t work out as advertised and why most people don’t become millionaires through these schemes. Here’s a breakdown:
1. Unsustainable Growth
Exponential growth (like the kind promised with daily compounding) is extremely powerful, but it’s also extremely difficult to sustain in the real world. A 1-2% daily return is equivalent to a 3778% to 13780% annual return! To compare, the average stock market return is around 7-10% annually.
Companies promising this level of return over long periods would need to find investments with extraordinarily high returns to keep paying out, and very few (if any) legal investments exist that can guarantee such returns over time.
2. Ponzi or Pyramid Schemes
Many investment schemes offering 1-2% daily returns are Ponzi or pyramid schemes. These schemes use the money from new investors to pay returns to earlier investors, rather than generating real profits. As long as new money keeps flowing in, they can make payouts.
Eventually, these schemes collapse when there aren’t enough new investors to pay returns to earlier investors. At that point, the majority of investors lose their money. Many of the companies offering such “guaranteed” high returns shut down or disappear after a few months.
3. Regulation and Legality
High-yield investment programs (HYIPs) that promise daily returns often operate in a legal gray area or are outright scams. Most of these schemes are not regulated by any financial authorities, meaning there’s no legal recourse if the company disappears with your money.
Regulated financial institutions do not offer such returns because they’re aware that it’s impossible to sustain them long-term without significant risk or illegal activity.
4. Market Volatility and Risks
Genuine investments involve risk. Stock markets, bonds, real estate, and other traditional investments do not guarantee consistent daily returns. Even the most successful investors experience losses during downturns, market corrections, or poor performance of assets.
To offer such high daily returns, companies would need to engage in extremely risky investments (such as high-leverage trades, risky startup funding, or speculative assets like cryptocurrency). While high-risk investments can sometimes yield high returns, they can also result in total loss.
5. Compounding Fees and Hidden Costs
Many investment schemes offering high daily returns also include hidden fees or withdrawal limits. Even if you think you’re earning a high return, fees or the inability to withdraw your money can erode your returns significantly.
Withdrawal penalties are common in these types of schemes. Often, you’re required to lock your money in for long periods, and when you try to take it out, you either face delays or restrictions.
6. Short-Lived Gains
Even if a company offers 1-2% daily returns for a short period, it is usually unsustainable in the long term. Many companies may offer these rates as promotional tactics to attract a lot of investors, but they collapse or shut down once they’ve collected enough money, leaving investors with nothing.
Early adopters might make money, but the majority lose out when the scheme inevitably collapses.
7. Economic Realities
- No legitimate market can consistently yield such high returns without significant underlying economic value. Legitimate companies need to invest in tangible businesses, assets, or products that generate profits over time. A daily return of 1-2% would indicate a company making exponential profits, which is rarely seen outside of illegal or extremely speculative practices.
Conclusion: Why We Aren’t All Millionaires
While the math behind compounding daily at 1-2% suggests immense wealth could be possible, the reality is that these kinds of returns are unrealistic and unsustainable in legitimate investments. Most companies offering such returns are fraudulent, and the vast majority of investors in these schemes lose their money. These schemes exploit our understanding of compound interest and offer false promises of quick wealth, but they almost always end up collapsing or turning out to be scams.
If you ever encounter an investment offering such high returns, it’s best to approach it with caution and skepticism, as the risks of losing your entire investment are extremely high.