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Invest Better
Time and Compounding are the Investor’s
Best Friends
The Stock Tip that
Wasn't
A No Risk, Guaranteed Return
Time and Compounding
are the Investor’s Best Friends
When it comes to investing, the most important
tool you have is time. A relatively small investment can
become a sizable retirement fund given time and the impact
of compounding. Compounding is the process of earning interest
on interest and dividends on dividends, over time. At first,
your money grows relatively slowly, then with increasing
speed as compounding takes effect.
One of the all-time great examples of
the impact of compounding is the question…Which would be
the better compensation plan?
$100,000 per year with 10% annual increases
One penny the first month, with your pay doubling with each
successive month?
In three years, the individual who chose
the $100,000 salary with 10% annual increases would have
received $331,000 in compensation. The individual who chose
the penny and saw her income double each month would have
received $687 million dollars. Naturally, that’s compounding
to an extreme. But the same basic principle holds true at
lower rates of appreciation.
Suppose you invested
$100,000 for 20 years at 8% annually with earnings paid
quarterly. In one scenario, you withdraw your earnings each
year. In a second, you reinvest those earnings at 8%. Assuming
no taxes are paid, in 20 years, the account that is allowed
to compound will be worth $488,640 - a $388,640 increase
in value. If you had simply withdrawn your earnings each
month, you would have $260,000, an increase of $160,000
over your original investment.
The sooner you put your savings
and investment plan into action, the longer your money goes
to work for you. And the longer compounding has to work
its math, the more substantial your nest egg can become.
To enhance the power of compounding, you
want to minimize the impact of taxes. After all, every dollar
you pay in taxes reduces the amount you have to compound.
For example, if you had to pay 15% capital gains taxes on
your earnings each year, at 8% your account would grow to
just $349,000 in 20 years. That’s why it’s important to
invest as much as you can in tax-deferred retirement accounts,
or better yet, a Roth IRA where earnings accumulate tax
free.
Understanding the value of time and compounding
is one step toward accumulating a healthy retirement fund,
but the most important step is to do something. Until you
set up a plan of steady contributions using an investment
approach that works for you, you are letting time and the
value it can bring slip away.
Nothing happens unless someone does something.
Whether it’s for your own retirement or a young person’s,
call me today and let’s put a plan in place to build financial
security.
The compounding examples cited above
are hypothetical and used for illustrative purposes only.
Investment results fluctuate and past performance is not
indicative of future results. The possibility of loss exists
along with the potential for profit.
The Stock Tip that
Wasn't
One of the oldest scams in the stock business
has gotten even easier with the internet. It begins when
a broker calls or emails you with a hot tip, a stock on
its way up. Naturally you give it a pass, but when you find
out the stock did go up and the broker is back with another
hot idea, you'll probably listen a little closer. By the
third winner, you start to think this guy really does have
something and perhaps you should invest.
What the guy really has is a big list.
Using classic marketing tactics, he breaks his list into
two parts and pitches the same stock to rise with half the
group and to fall with the other half. Those he gives the
wrong forecast are crossed off the list and the con man
calls the second half to tell them what a great job he did
and how he has another hot idea. The list gets smaller with
each call, but given a 50% chance of success, the caller
is very likely to end up with a select group of people ready
to entrust him with their money for all the wrong reasons.
A No-Risk, Guaranteed
Return
Are you passing up a no-risk, guaranteed
opportunity to increase your retirement savings? If you
are not contributing the maximum to any retirement plan
where your employer provides a matching contribution you
are passing up a guaranteed means of increasing your money,
without taking on any risk. And, you will not have to pay
taxes on that money until it is withdrawn at retirement.
There are very few "real deals" in investing, but employer
matching contributions are an opportunity investors should
never pass up.
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