Showing posts with label lump sum investing. Show all posts
Showing posts with label lump sum investing. Show all posts

Thursday 16 January 2020

Buying: Leave Room to Average Down

The single most crucial factor in trading is developing the appropriate reaction to price fluctuations.

Investors must learn to resist 
  • fear, the tendency to panic when prices are falling, and 
  • greed, the tendency to become overly enthusiastic when prices are rising. 

One half of trading involves learning how to buy. 
  • In my view, investors should usually refrain from purchasing a "full position" (the maximum dollar commitment they intend to make) in a given security all at once. Those who fail to heed this advice may be compelled to watch a subsequent price decline helplessly, with no buying power in reserve. 
  • Buying a partial position leaves reserves that permit investors to "average down," lowering their average cost per share, if prices decline. 


Evaluating your own willingness to average down can help you distinguish prospective investments from speculations. 

  • If the security you are considering is truly a good investment, not a speculation, you would certainly want to own more at lower prices. 
  • If, prior to purchase, you realize that you are unwilling to average down, then you probably should not make the purchase in the first place. 

Potential investments in companies that are

  • poorly managed, 
  • highly leveraged, 
  • in unattractive businesses, or 
  • beyond understanding 
may be identified and rejected.

Thursday 25 October 2012

Is Dollar-Cost Averaging Overrated?



Question: Every year I add money to my IRA account in a lump sum. Would I be better off using dollar-cost-averaging over the course of the year?
Answer: Dollar-cost-averaging, which is a technical term for buying shares of a stock or mutual fund in equal dollar amounts and at regular intervals, is assumed by many investors and financial pros to be the best way to invest. The advantages are clear: By investing a given amount over time and in equal-sized chunks rather than all at once, the investor ends up buying more shares when prices become cheaper and fewer when they become more expensive.
For example, let's say you get a $1,200 tax refund. Rather than invest all $1,200 at once, you could invest $100 per month for a year. Now let's say the fund you're investing in sells for $10 a share in the first month but drops to $5 a share in the second. Using the dollar-cost averaging method, you would end up buying 10 shares in the first month, before the market drop, but 20 shares in the second, after the drop. Had you invested the entire $1,200 in the first month you would have owned 120 shares, which, in month two, would have declined in value to $600. In this way, dollar-cost averaging helps reduce an investor's exposure to a potential market downturn, a danger inherent in the lump-sum approach.
Dollar-cost averaging also fosters a level of investing discipline. Rather than trying to figure out the best time to invest a lump sum, dollar-cost averaging uses a more systematic approach that helps investors conquer bad habits such as buying shares only when the market is up.
If you have an employer-sponsored retirement account, you may be using dollar-cost-averaging without even knowing it. That biweekly or monthly contribution made to your 401(k) is a form of dollar-cost-averaging.
Putting Dollar-Cost Averaging to the Test
However, despite the conventional wisdom that dollar-cost averaging is usually the best way to invest, there is an opportunity cost to be paid for holding money in cash while it waits to be invested in the market. If the market goes up while you're dollar-cost averaging into it, you've lost out on any gains you would have had by investing the entire amount right away.
In fact, a recent Vanguard study found that, on average, lump-sum investing resulted in higher returns than dollar-cost averaging about two-thirds of the time. The authors looked at historical monthly returns for $1 million invested as a lump sum and through dollar-cost averaging over periods as short as 6 months and as long as 36 months, assuming that funds were kept in cash before being invested. They tested various stock/bond allocations ranging from an all-equities portfolio to an all-bond portfolio. Finally, they tested these variations on the dollar-cost averaging vs. lump-sum question over rolling 10-year periods from 1926-2011.
At the end of each 10-year period, the portfolio value of the lump-sum method was compared with that of the dollar-cost averaging method. The result: The lump-sum method delivered higher returns compared with the 12-month dollar-cost averaging method about 66% of the time regardless of whether an all-equities, all-bond, or 60% equity/40% bond allocation was used. When the authors conducted a similar analysis using historical returns for markets in the U.K. and Australia, a similar pattern emerged, with lump-sum investing consistently outperforming dollar-cost averaging.
The authors note that the longer the dollar-cost averaging time frame, the greater the chance of the lump-sum method outperforming. For example, dollar-cost averaging over 36 months lost out to the lump-sum method 90% of the time (for U.S. markets).
It's also worth noting that while lump-sum investing consistently outperformed dollar-cost averaging, the average rate of outperformance was relatively modest. Using a 60/40 equity-bond allocation in U.S. markets and dollar-cost averaging over a period of 12 months, the authors found that after 10 years the initial $1 million investment would have grown to $2,450,264 on average using the lump-sum method versus $2,395,824 using dollar-cost averaging, a difference of about $54,000 or 2.3%.
DCA Better in Declining Markets 
So the Vanguard study proves it's always best to invest in a lump sum if possible, right? Not so fast. As the authors concede, during market declines, the dollar-cost averaging method often performs better because it helps mitigate the effects of falling share prices, whereas the lump-sum method puts all the capital at risk in the market at once. They examined more than 1,000 rolling 12-month periods in U.S. markets and found that lump-sum investors would have seen their investment decline in value 22.4% of the time vs. 17.6% for dollar-cost averaging.
The Takeway
So what should we make of these findings? There appears to be little doubt that, when investing for the long-term, you'’re more likely to end up ahead using the lump-sum approach than dollar-cost averaging. (Again, assuming you have a choice--with a work-sponsored retirement account, you may not.) However, there are three important points in dollar-cost averaging's favor.
If you expect a market downturn in the near future, dollar-cost averaging is the better choice. By spreading out contributions at regular intervals, you are essentially limiting your exposure by keeping some of your money in cash. 
For some investors, a relatively modest shortfall in return is a small price to pay for piece of mind. If dollar-cost-averaging helps you sleep better at night than you would with an all-in strategy, it may be worth it.
Dollar-cost averaging, especially through an automatic contribution mechanism such as a 401(k) or automatic deduction from a bank account, offers a level of investing discipline that lump-sum investing doesn't. The lump-sum approach, by its nature, involves market timing, and that's a dangerous game to play, especially during times of volatility. Dollar-cost averaging provides a smoother, more consistent entry into the market.One last factor to consider is investing costs, which may provide an advantage for the lump-sum method. For example, if using dollar-cost averaging requires paying multiple brokerage fees to buy shares of a stock in several lots rather than just once, this may further erode your returns as compared with the lump-sum method.
Ultimately, your comfort level with lump-sum investing and your expectations about the market's near-term direction should help you decide if it makes sense for you. If moving a lump sum into the market all at once gives you a queasy feeling in the pit of your stomach, that may be all the answer you need.
Have a personal finance question you'd like answered? Send it toTheShortAnswer@morningstar.com.

Wednesday 3 February 2010

Good strategies for buying in and for preventing big losses

Strategies for buying in:
  • Lump sum investing
  • Dollar cost averaging
  • Phasing in

Strategies for preventing big losses:
  • Stop loss strategy
  • Rebalancing


Dollar cost averaging and phasing in strategies are useful for those who wish to reduce the risks associated with market timing. 

Regardless of the buying in strategies (lump sum, dollar cost averaging or phasing in), acquisitions should only be done when the stock is available at bargain price or fair price, and certainly never when it is overpriced.

Stop-loss maybe unnecessary for some or many investors if the other risk management ideas are followed.

Value investors with a long term investing time horizon rarely need to use stop loss strategy.   In fact, the drop in price offers an opportunity for the value investor to reduce his cost per share.  This is safe provided he has not made a mistake in his initial assessment of the quality, value and management (QVM) of the stock.

Rebalancing at regular or fixed intervals can be usefully employed to bring his equity portion to a previously determined set proportion of his asset allocations in his portfolio.  This is particularly useful for those who are unable to take big risks (big losses: real or missed profit losses) during the bear or bull markets.

Though theoretically attractive, to be able to profit through rebalancing, near the peak of the bull or near the depth of the bear market, assumes one has the ability to predict (time) the market consistently.  This is of course not possible.

Always keep in perspective the 3 personal factors that are very important in your investing:  time horizon, risk tolerance and investing objectives.

Monday 1 February 2010

Two techniques for Getting your timing right: 'dollar cost averaging' and 'phasing in' your investments

Experience has shown that investors can benefit from being patient.  Impatience is your big enemy. 

Too often investors panic and sell their shares and equity unit trusts at a low, which could result in substantial losses.

There are two techniques:
  • dollar cost averaging, and
  • phasing in
which can diminish the negative impact of buying and selling at the wrong times.


Dollar cost averaging

Those who continue investing at regular intervals in the expectation that the market will recover, benefit from dollar cost averaging.

Dollar cost averaging can be used to great effect with unit trusts, because as you buy more units for the same amount as prices fall (or fewere units as prices rise), you will ultimately pay a lower average price for your units.


Phasing in your investments

In times of uncertainty new unit trust investors are faced with a tough choice: 
  • should they invest a lump sum, or
  • should they phase in their investment over a period? 
They have two possibilities:

A lump-sum investment can be made in
  • unit trusts with a large cash element,
  • a share component that does not correlate with the general direction of the stock market, and
  • a portfolio manager who does not hesitate to take action.

Phasing in:  Prudent or less experienced investors can consider
  • phasing in their investments over some months,
  • potentially benefiting from lower prices because of downward reactions.

Sunday 21 June 2009

Short-term gain, long-term pain

Just reviewing my transactions in one of my stocks which I have invested since the 1990s. This review starts from May 2006.

The bought and sold transactions since May 2006

15-May-06 xx Bought at 3.98 Present price 8.35 Gain 4.370
31-May-06 xx Bought at 4.06 Present price 8.35 Gain 4.290
13-Jun-06 xx Bought at 3.92 Present price 8.35 Gain 4.430
26-Mar-07 xx Bought at 5.75 Present price 8.35 Gain 2.600
29-Mar-07 xx Bought at 5.95 Present price 8.35 Gain 2.400
03-Jun-07 xx Sold some at 5.3
28-Aug-07 xx Bought at 8.25 Present price 8.35 Gain 0.100
28-Jan-08 xx Sold some at 8.05
06-May-09 xx Bought at 7.70 Present price 8.35 Gain 0.650
05-Jun-09 xx Bought at 7.95 Present price 8.35 Gain 0.400

Stock xxx Avg Price --- Present price 8.35 Gain ---

The present price of this stock is 8.35.

The annual dividend yield of this stock is better than the present FD rate.

Its share price peaked at 9.25 in second half of 2007.

During the severe 2007 - 2008 bear market, the share price was at the lowest of $6.30 in September 2008.



Observations:

There were 10 transactions: 10 buys and 2 sells (partial).

Buying this stock at regular intervals has been profitable.

The prices of the stock bought in the early years were lower than those bought in the later years.

The share price of this stock (good quality company) has reflected its eps and eps growth rate over time.

At the lowest share price of $6.30, the average price of all the transactions were still lower than this market price.

Some stocks were sold for various reasons (e.g. to lock in gains/ or in anticipation of market downturn/ asset allocation/ etc.) in Jun 07 and Jan 08 for 5.30 and 8.05. The present price of this stock at 8.35 is higher than these selling prices.


DISCUSSION:

1. Buying this stock for the long term is safe and profitable.

2. Short term volatilities offer opportunities to buy this stock at bargain prices.

3. The above buying is almost akin to dollar cost averaging (upwards) and it is safe. Dollar cost averaging (downwards) is also safe and probably can give even better returns.

4. Selling this stock at anytime during the 2007-2009 severe bear market and not reinvesting into the same stock at lower prices, gives a lower return than the investor who held onto his stocks during the same period.

5. Lump sum investing into this stock at bargain prices in the earlier years, may give a better return, than dollar cost averaging the same amount over a very long time frame. Dollar cost averaging over a few months (for example 6 months) is almost equivalent to lump sum investing.

6. Timing the market is difficult. Study the above transactions:
  • Did this investor buy during the depth of the 2007 - 2009 severe bear market? (This investor has to put in more work on this topic!)
  • Did this investor sell at the height of the bull market?
7. In the transactions above, ''buy and hold' strategy can be likened as short term pain for long term gain. In the transactions above, 'buy, sell, and buy back at higher price', can be likened to short term gain for long term pain. ;-)

8. The average price of all the above transactions were significantly lower than the market price almost all the time. This is so even when the market price was at its lowest of $6.30. This gain provides a significant buffer and confidence to the investor of this stock. A value investor would be happy to hold or even load up on this share at the low prices.


CONCLUSION:
It is safe and profitable to buy and hold this and selective stocks.

Selective stocks can be held safely for the long term, even in a severe bear market.

Selling a good quality stock for short-term gain, generates cash which will need to be reinvested. This is not without its associated risks, including, that of not achieving your objective of superior gains in your investments (for example, 15% per year, doubling in 5 years).

Timing the market to buy and to sell is tempting, but is difficult. (trust me on this).

Selling and buying incurs some costs, and when are done frequently, will reduce your returns.

Saturday 13 June 2009

Lump-sum investing beats dollar cost averaging over 60% of the time

Dollar Cost Averaging versus Lump Sum Investing?

This question actually came up last year, but I didn’t research it very much. My own thoughts were that because the markets trend upwards overall, if you are investing for a long-term period you should get your money in as soon as possible. Sure, you might run into a huge drop, but you could just as easily (in fact more easily) miss a huge rise. But this is too hand-wavy, as scientists would say. I want numbers. So I found some.

Now, wouldn’t it be nice to have a comparison of DCA vs. lump-sum investing for the past 50+ years? We could compare investing $10,000 all at once in January of 19xx, versus using DCA equally over all 12 months of that year. Wouldn’t it be even nicer if we could take into account that any money not used be put in a high-yield interest bearing account?

Well MoneyChimp did just that all the way back to 1950. The result? I used 4.25% rate for bank interest, and over 60% of the time, lump-sum investing beat dollar cost averaging. This result of DCA losing out about 2/3rds of the time is supported by historical back-testing from 1926 in this article from the Financial Planning Association: ‘Lump Sum Beats Dollar-Cost Averaging‘. (Just read the conclusion if you get bored.)

Of course, past performance does not guarantee future results. And DCA would smooth things out if your time frame is really short. I think everyone should consider the facts above and make their own decision. But I bet with the odds, and the odds are that I should invest it as a lump-sum.

Wednesday 17 December 2008

Wade into the market? Or plunge?

Mutual Funds10/21/2008 12:01 AM ET
Wade into the market? Or plunge?
Evidence suggests that jumping right in with your money may generate better results than investing gradually over time. Here's why.
By Tim Middleton
With the stock market wackier than Daffy Duck, risk has risen to unprecedented levels. On Thursday, the CBOE Volatility Index ($VIX.X), which measures volatility of the prices of stock-futures contracts, soared to 80 -- the highest in its history. It's often called the fear index, and any reading over 30 is considered ominous.
That's a reason one of investing's most treasured precepts -- dollar-cost averaging, or DCA -- is finding wider and wider acceptance. You do this automatically in your 401(k), contributing a fixed amount each month, whether stocks are up or down. Thus, in a period of volatility, you spread your risk. This year, prices were down in seven of the first nine months, with extreme losses in January, June and September, not to mention the first couple of weeks of October.
But dollar-cost averaging is mind balm only. It doesn't actually reduce risk, and it doesn't increase returns.
In fact, there's evidence that investors should approach the market more aggressively. Over short periods as well as long, investing lump sums is the equal of dollar-cost averaging, except in those rare times when the market is going straight up, when lump-sum investing does better.
"At our firm, we tell clients that there is no difference," says Paul A. LaViola, the vice president of RTD Financial Advisors in Philadelphia. "However, emotionally, it can make someone feel better if they DCA when the market is going down or they are unsure about the market."
My household invests both ways, twice monthly in my wife's 403(b) and our brokerage and mutual fund accounts, and lump sums into my SEP-IRA (simplified employee pension individual retirement account) two or three times a year. My wife recently changed jobs, and we'll be rolling her old 403(b) into an IRA. It's a considerable amount, and we'll reinvest all of it. DCA is pointless, except as a crutch.
Surprising results Don't believe me? You're not alone. "I am a huge proponent of dollar-cost averaging, especially in volatile times like we are currently experiencing," says Jane M. Young of Pinnacle Financial Concepts in Colorado Springs, Colo. "I have not conducted any studies, so my opinion is based on 12 years' experience working with clients." I can understand that financial novices -- the clients of financial advisers -- are soothed by DCA. But I have done some research, and here's what I've found:
Vanguard 500 Index Fund (VFINX) over 10 years


Investments of $100 per month
Lump-sum investments of $1,200 per year
Lump-sum performance (compared with monthly investments)

Date
Price
Total portfolio value
Total portfolio value
Total portfolio +/-
Annual dollar +/-
Annual percentage +/-
Market performance
Nov. 2, 1998
$108.49
$100
$1,200
Oct. 1, 1999
$126.05
$1,267
$1,394
$128
$128
10.1%
16.2%
Oct. 2, 2000
$132.02
$2,521
$2,692
$171
$44
1.7%
2.7%
Oct. 1, 2001
$97.86
$2,922
$2,961
$39
-$132
-4.5%
-19.5%
Oct. 1, 2002
$81.87
$3,493
$3,410
-$83
-$122
-3.5%
-22.3%
Oct. 1, 2003
$97.19
$5,498
$5,390
-$108
-$25
-0.5%
11.8%
Oct. 1, 2004
$104.55
$7,130
$7,078
-$52
$56
0.8%
6.7%
Oct. 3, 2005
$111.30
$8,798
$8,763
-$36
$16
0.2%
2.3%
Oct. 2, 2006
$127.04
$11,324
$11,322
-$2
$34
0.3%
10.0%
Oct. 1, 2007
$142.83
$13,999
$14,053
$54
$56
0.4%
10.4%
Oct. 1, 2008
$82.87
$8,962
$8,880
-$82
-$136
-1.5%
-39.4%
Note: Figures may not add up because of rounding.
This shows the relative performance of two portfolios established 10 years ago in the Vanguard 500 Index Fund (VFINX), the investable form of the standard stock benchmark. One investor put in $100 on the first day of every month. The other put in $1,200 on Nov. 1 of each year.
Ten years later, we can see there is no significant difference in their returns, either in their total over the period or their annual performance. Even in this disastrous year, when the fund itself has gone down 39.4% in the past 12 months, the lump-sum investor did only 1.5% worse than the DCA investor. The greatest disparities in the overall portfolio were a lump-sum advantage of $171 in 2000 and a DCA advantage of $108 in 2003.
I shared my study with several financial advisers, and one raised two pertinent questions about my method: Why did I choose to begin in November, as opposed to some other month? And why did I choose Vanguard 500 rather than a surrogate for some other benchmark, such as small caps or foreign stocks?
To answer the first, I wanted 10 full years of data, as of the most recent possible date. Beginning in November 1998 allows both investors to make identical annual contributions. Further, I chose Vanguard 500 because this is the market. Most investors have the bulk of their equity assets in domestic big caps.
The adviser didn't ask why I chose 10 years as my study period, but I'll tell you anyway: It reflects roughly five years each of bull and bear markets. In fact, the current bear market and that of 2000-02 are both monsters, marked by declines of more than 40% -- the only time besides 1973-74 this has happened since the 1930s.
If anything, such extreme downward volatility should have favored the DCA investor. But it didn't.
Continued: What advisers say
What advisers say One adviser with whom I shared my study said it was unconvincing because the lump-sum contributions each November themselves represent DCA, only annually instead of monthly. More realistic, he said, is the lump sum that arrives possibly only once in a lifetime, such as an inheritance or 401(k) rollover.
"Accordingly, for most of my clients I say, 'Why not just invest the lump sum and be done with it?' Most people will take this approach," says Warren J. McIntyre of VisionQuest Financial Planning in Troy, Mich. "However, for someone skittish about the market by nature, especially during a volatile time like now -- I think DCA is a great strategy from a psychological standpoint."
Fair enough. Every investor needs to remain in his own comfort zone. But research from DCA critics has demonstrated that lump sums aren't just the equal of DCA but are instead superior to it.
Dimensional Fund Advisors, a firm that runs sophisticated index funds that are sold only through financial advisers it trains in-house, did a study in 2004 called "To Wade or Plunge." In it, the firm studied four types of portfolios -- domestic equity, domestic balanced, global equity and global balanced -- over periods dating to 1970 for foreign securities and to 1927 for domestic stocks and bonds. In the trials, one portfolio invested on the first day of each year, while the other invested quarterly.
"For the domestic portfolios during the 1927-2003 period, plunging beat wading in about two-thirds of the trials. The average one-year excess return of plunging over wading was nearly 6% for the domestic equity portfolio and about 4% for the domestic balanced portfolio," the study says.
"For global and domestic portfolios during the 1970-2003 period, plunging again beat wading in about two-thirds of the trials. The average excess returns for plunging over wading were about 4.5% for global equity, 3% for global balanced, 5% for domestic equity and 3.4% for domestic balanced."
Despite such evidence, most of the two dozen or so financial advisers I polled last week are strong supporters of DCA. I don't blame them. What if they had recommended that a new client take the plunge on Oct. 1? By Oct. 10, the Vanguard 500 fund was down 22.5%. The client would have been gone, and everyone he met for the rest of his life would hear what a lousy adviser that poor sap turned out to be.
But if I had invested a bundle on Oct. 1, I would have gritted my teeth and held on. By Oct. 13, my loss was only 13.5%. Ten years from now I'll be lucky if I can remember what happened in those 10 days. And I would be sitting on a nice wad of money.
So take your choice. You'll probably make more money investing lump sums, but there's a chance you won't. You make choices like this all the time; you can break your neck riding a bike. TV's Monk -- whose theme song is "It's a Jungle Out There" -- doesn't strike me as the lump-sum type, but I suspect most of us are.
Meet Tim Middleton at The Money Show MSN Money's Tim Middleton will be among more than 50 investing experts gathered in the nation's capital Nov. 6-8 for the fourth annual Money Show Washington, D.C. Just days after the election, this elite group will present more than 170 free workshops to help you prepare for changes in the political landscape. Admission is free for MSN Money users.
To register, call 1-800-970-4355 and mention priority code 009554, or visit the Money Show Washington, D.C., Web site.

At the time of publication, Tim Middleton didn't own any securities mentioned in this article.

http://articles.moneycentral.msn.com/Investing/MutualFunds/wade-into-the-market-or-plunge.aspx?page=all

Thursday 27 November 2008

**Understanding the Power of Compounding

Understanding the Power of Compounding

Compounding in Action

The investment rate assumes a return net of taxes and fees.
The effect of inflation on the purchasing power of the FV can be offset by increasing your annual contributions by a like percentage. As your income increases, so too should your investment contributions.

-----

The Future Value of investing $1,000 per annum, when compounded by the annual rate of 6% for the number of years are as shown below:

Rate 6%

Years... FV
10 years 13,181
20 years 36,786
30 years 70,058
40 years 154,762
50 years 290,336

The once-only lump sum invested at the same annual rate for the years to provide the same FV as the corresponding sum are as shown here:

Years... Initial once-only lump sum
10 years 7,360
20 years 11,470
30 years 13,765
40 years 15,046
50 years 15,762

A lump sum of $7360 invested for 10 years at 6 percent will produce the same FV ($13,181) as $1000 a year for 10 years.

-----

The Future Value of investing $1,000 per annum, when compounded by the annual rate of 8% for the number of years are as shown below:

Rate 8%

Years... FV
10 years 14,487
20 years 45,762
30 years 113,283
40 years 259,057
50 years 573,770

The once-only lump sum invested at the same annual rate for the years to provide the same FV as the corresponding sum are as shown here:

Years... Initial once-only lump sum
10 years 6,710
20 years 9,818
30 years 11,258
40 years 11,925
50 years 12,233

A lump sum of $6,710 invested for 10 years at 8 percent will produce the same FV ($14,487) as $1000 a year for 10 years.

-----

The Future Value of investing $1,000 per annum, when compounded by the annual rate of 10% for the number of years are as shown below:

Rate 10%

Years... FV
10 years 15,937
20 years 57,275
30 years 164,494
40 years 442,593
50 years 1,163,909

The once-only lump sum invested at the same annual rate for the years to provide the same FV as the corresponding sum are as shown here:

Years... Initial once-only lump sum
10 years 6,145
20 years 8,514
30 years 9,427
40 years 9,779
50 years 9.915

A lump sum of $6,145 invested for 10 years at 10 percent will produce the same FV ($15,937) as $1000 a year for 10 years.

-----

The Future Value of investing $1,000 per annum, when compounded by the annual rate of 12% for the number of years are as shown below:

Rate 12%

Years... FV
10 years 17,549
20 years 72,052
30 years 241,333
40 years 767,091
50 years 2,400,018

The once-only lump sum invested at the same annual rate for the years to provide the same FV as the corresponding sum are as shown here:

Years... Initial once-only lump sum
10 years 5,650
20 years 7,469
30 years 8,055
40 years 8,244
50 years 8,304

A lump sum of $5,650 invested for 10 years at 15 percent will produce the same FV ($17,549) as $1000 a year for 10 years.

-----

The Future Value of investing $1,000 per annum, when compounded by the annual rate of 15% for the number of years are as shown below:

Rate 15%

Years... FV
10 years 20,304
20 years 102,444
30 years 434,745
40 years 1,779,090
50 years 7,217,716

The once-only lump sum invested at the same annual rate for the years to provide the same FV as the corresponding sum are as shown here:

Years... Initial once-only lump sum
10 years 5,019
20 years 6,259
30 years 6,566
40 years 6,642
50 years 6,661

A lump sum of $5,019 invested for 10 years at 15 percent will produce the same FV ($20,304) as $1000 a year for 10 years.

-----

Note:
It is not so much the increase in FV over the early 10-year periods of the savings plan, but the increase over the final 10-year period that yields the big bucks.

For instance, if we reference the compounding at 10 percent, FV increased by $41,338 between years 10 and 20, while the increase between years 40 and 50 was $721,316.

Thereafter, if you start your investment plan at age 30 rather than 20, the $1,000 a year you spent before that rather than invested will have cost you $721,316.

The greatest deterrent to an investment plan is not so much the fortitude to put aside a small percentage of income, but the willpower not to steal from the fund until your regular employment income ceases. Anyone can become rich if they start an investment plan early in life.

Of course, the more you love your work, the longer you will be employed and the more savings you will accumulate. If you find the thought of working until you are 70 abhorrent, then the thought of working at 30 or 40 years of age will be even less attractive; in which case, investing is probably irrelevant because you’re going to have a miserable or unfulfilled life anyway. People who hate working are more likely to become welfare dependent.

Lump sum investing
A lump sum of $7,360 invested for 10 years at 6 percent will produce the same FV ($13,181) as $1,000 a year for 10 years.

A lump sum of $9,779 invested for 40 years at 10 percent will produce the same FV ($442,593) as $1,000 a year for 40 years.

If the same lump sum were invested 10 years earlier – that is, allowed to compound for 50 years, rather than 40 – the nest egg will be boosted by a further $705,372 to $1,147,965.

Have you ever thought about putting something aside for your kids that they can’t touch for 50 years?

Sentiment and moral gratification usually centre on diminishing their incentive to achieve their own sense of self-satisfaction by helping them when they get married or want to buy a house.

If they are like 98 percent of people, the time they really need financial help is after they have lived the good life and have limited savings and no career income.

Material assets are not so important when you have the greatest asset of all: youth.


Related readings:
Oriental Holdings Bhd: The Buy-Hold Advantage
http://www.horizon.my/2008/11/oriental-holdings-bhd-the-buy-hold-advantage/

Oriental Holdings Berhad - What if You had Bought and Held? I happened to be reading the Annual Report of Oriental Holdings Berhad (ORIENT) the other day and came across a statement by Chairman Dato Loh Cheng Yean:

“A holding of 1,000 stocks in Oriental when it was listed in 1964 would translate into 40,255 Oriental stocks worth RM263,670, based on the share price of RM6.55 at the end of 2007. In addition the stocks would have earned a total gross dividend of RM137,660. The gross dividends received and the appreciation in value is equivalent to a remarkable average rate of return of 14.60% for each of the 44 years.”

This sounds pretty good… see once again we’re talking 40 years. I find Oriental Holdings to be quite “remarkable” because it is such a diverse collection of different businesses which include auto assembly, auto parts manufacturing, oil palm, hotels, property etc. But 85% of its RM498 million Operating Profit is from auto and oil palm.



The Story of Anne Scheiber
http://www.horizon.my/2008/11/the-story-of-anne-scheiber/
Maxwell recounts the story of Anne Scheiber, an elderly and thrifty lady who lived in New York and worked for the Inland Revenue Service. When Scheiber retired at age fifty-one, she was only making $3,150 a year. She was treated poorly by her employer and was never promoted. Yet when Anne Scheiber died in 1995 at the age of 101, it was discovered that she left an estate to Yeshiva University worth US$22 million!
How did a public service worker with minimal salary accumulate such a staggering wealth?

Comments by: banking88 on November 25th, 2008 12:13 pm
yes, the key is to invest for the long-term…your wealth would multiply with componding returns…now it’s a good time to enter the market using the dollar cost averaging method…