There are many methods to accumulate wealth – you can marry into it (there are many stories about people overlooking the negative aspects of their spouse for the money they bring into the marriage). You can win a lottery (the writer plays a lottery but rarely wins over $15). You can be a robber baron – steal it from people. You can invest in the perfect stock and it goes up and you win, although you should be reminded that there are many stocks in the market and only a few that are very big winners. The other way is over time – if you live in the correct neighborhood over time your home will go up in value. You can live on less than you make and save the rest to make investments or you can live on a little less than you make and make investments. For the average person, the last example is the best one.
Andrew Hallam wrote an article in the Globe and Mail and he wrote he was a teacher. He used the examples:
Jill begins at 16 and invests $240 a month every month till she is 65. How much would Jill save? The answer is $240 a month x 12 months x 49 years is $141, 120.
Lisa starts investing $1500 a month at the age of 40. How much does she save at 65? The same process $1500 x 12 months x 25 years is $450,000.
Who would have more if they averaged 8% a year. Why 8%?
Short term returns are often horrible, but investing is not a sprint, it is a marathon. Using information from DQYDJ.com and the Stingy Investor Asset Mixed calculator, the results were:
for the 25 years ending in 2008, the average was 10.2%
if you started in January 1929, 25 years late the average was 8.14%
Using compound interest and 8% to be conservative the answer is Lisa would have $1,421,179 but Jill would have $1,718,310.
There are a wide variety of funds to put your money into such as ETFs or mutual funds but the key is to start early, keep fees reasonably low and let compound interest help you.
Linking to dividend paying stocks, ideally some of your investments include a dividend stock ETF or fund because the dividends which can be rolled over means the companies inside the fund are making money and they will tend to trade at higher multiples for stock growth. You benefit it two ways even though you are trying to ensure capital preservation is the key.
There are more questions than answers, till the next time – to raising questions.