Thursday December 20, 2012
by Chuck Carlson, editor DRIP Investor
Successful investing is all about two things: harnessing the power of time and capturing crumbs. Yes, I know things like picking the right investments and being properly diversified relative to your risk profile matter as well.
But at the end of the day, the two factors that will have the greatest impact on your investment success are time and crumbs. I’ll let math prove my point.
First, the crumbs:
➤ A 25-year old who invests $50 per month and earns an average annual return of 5% per year — about half the historical return of the stock market — will amass a nest egg atage 70 of $98,395. Keep in mind that the total contributions would be just $27,000 over the 45-year period.
➤ Now, if that same 25-year old can eke out a few more crumbs each month to invest — say, $65 per month — the portfolio (assuming the same annual 5% return) will be worth $127,915, a 30% increase over the $50-per-month plan. Interestingly, to achieve that 30% increase requires only an additional $8,100 in contributions over the 45-year period.
➤ If that same 25-year old can eke out a few crumbs in terms of an- nual investment returns, the port- folio value jumps dramatically. For example, if that 25-year old invests $65 per month at 6.5% instead of 5% per year, the portfolio increases to $198,833 by age 70.
Thus, by “capturing crumbs” in terms of investment dollars ($50 to $65) and investment returns (5% to 6.5% annual return), the investor sees his/her investment more than double over 45 years.
Now, let’s look at the power of time.
➤ If this same 25-year old started his/her investment program 10 years earlier (at age 15), investing $65 per month at 6.5% per year would yield a portfolio worth over $384,000 at age 70, almost double the amount created by waiting 10 years and beginning the same investment program at 25. Total contributions to generate this healthy nest egg? Less than $43,000.
➤ Now, let’s back up just five more years to see how the power of time impacts this nest egg. A 10-year old investing $65 per month and earning an average annual return of 6.5% will have almost $531,000 at age 70. How much more did the 10-year old have to contribute to generate nearly $147,000 in additional investment gains? Less than $4,000.
Where can a 10-year old get the money to invest? This is a legitimate question, but one with a timely answer. We are entering the holiday gift-giving season. My guess is that you are probably scrambling to figure out what to buy your kids or grand kids or nieces or nephews for the holidays.
Why not buy them the gift of stocks, specifically DRIPs? Indeed, DRIPs are perfect vehicles for starting a youngster on the road to wealth building. DRIPs are excellent for harnessing the power of time.
Since you can get started in DRIPs with fairly small amounts of money, virtually any investor can initiate a DRIP plan or start one for a friend or loved one.
Second, because of their small and flexible ongoing investment requirements, it is easy to maintain a long-term investment program and increase your investments over time.
Third, because you are reinvesting dividends, you are building into the investment a powerful compounding tool. And finally, DRIPs are easy on the fees relative to other investments, thus allowing you to hold down investment costs and capture more crumbs when it comes to returns.
I’ve said this many times, but it bears repeating. If you can get a youngster interested in investing at an early age, you will absolutely change his or her life.
Start a youngster on the road to investing this holiday season. I can assure you it will likely be the most lasting gift he or she ever receives.
Learn more about this financial newsletter at Chuck Carlson's DRIP Investor.