|
Before
we get into the details of the techniques, I would like to give you
some insight for the potential of these techniques. For example, over
the last fifteen years, equity funds (i.e., mutual funds which invest
primarily in stocks) have averaged better than 15% annual return on
investment per year.
Assume you
invested as follows using dollar cost averaging for ten years:
|
Investment
Amount:
|
$100/month
|
|
Annual
Return: (compounded monthly)
|
15%
|
After ten years, you
would have invested a total of $12,000, but your account would be worth
$27,865. However, after ten years of investing using dollar value
averaging, you would have a steadily growing account (i.e., balance =
$12,000 and grow-ing by $100 per month), and an increasing income stream
all with none of your own money invested. With none of your own money
invested, you would effectively be getting an infinite return on
investment.
Table 1.1 below shows how much you would have after 5, 10, 20,
and 30 years using dollar cost averaging at 5, 10, 15, and 20% effective
returns on investment. Table 1.2 shows the results you would obtain if
you used dollar value averaging in a 15% annual return (compounded
monthly) over five to 30 years. As is the case for the dollar cost
averaging above, the initial investment is zero and the target growth
amount is $100 per month for both Tables 1.1 and 1.2.
Table
1.1 Future
Value of investing $100/month Using Dollar Cost Averaging
|
Dollar
Cost Averaging
|
Effective
|
Return
|
On
|
Investment
|
|
#
Years
|
5%
|
10%
|
15%
|
20%
|
|
5
|
$6,828
|
$7,808
|
$8.968
|
$10,345
|
|
10
|
$15,592
|
$20,655
|
$27,865
|
$38,236
|
|
20
|
$41,274
|
$76,569
|
$151,595
|
$316,147
|
|
30
|
$83,572
|
$227,932
|
$700,982
|
$2,336,080
|
Table
1.2 Future
Value of investing $100/month Using Dollar Value Averaging
|
Dollar
Value Averaging
|
Equity
Balance
|
Cumulative
Investment
|
Monthly
Income
|
|
5
years
|
$6,000
|
$3,803
|
-
0 -
|
|
10
years
|
$12,000
|
$3,059
|
-
0 -
|
|
20
years
|
$24,000
|
-$11,855
|
$298
|
|
30
years
|
$36,000
|
-$44,780
|
$448
|
As Table 1.2 shows, at the 20-year point, your account would only
be worth $24,000; however, the total amount you would have invested to
date (i.e., the Cumulative Investment) would have been negative $11,855
which means the account would have returned all the money you invested
plus $11,855. Furthermore, the monthly income at the 20-year point would
be $298 and increasing each month.
So, how
difficult is it to actually invest and achieve these kind of results? It
is very simple. In the previous paragraph, I mentioned equity funds.
These funds are actually
open-end investment funds more popularly called mutual funds. A mutual
fund is simply a company that receives deposits from many different
investors and employs one or more professional fund managers to invest
and manage the pooled money for the investors. Mutual funds are by
definition diversified in that they cannot own more than 10% of the
voting stock of any one com-pany, and no more than 5% of the total
assets of the fund may be invested in any one company's stock.
| NOTE:
Some funds (e.g., sector funds) are diversi-fied in this manner
but are still considered non-diversified since they invest all
their assets in a single industry such as energy or healthcare
companies.
|
Investing in
one or more mutual funds is as simple as calling up a fund company and
requesting a prospectus and an application (in some cases, you can get
them on the World Wide Web as well). When you receive the prospectus and
application, read the prospectus and complete the application; then mail
the application with a check, and you are done. To automatically invest
$100 per month, sim-ply complete the automatic deposit portion of the form as well.
Finally, before
moving into the details, there is one secret
to wealth you should understand and implement even if you do nothing
else with this book. This secret is the 10%
Rule.
|
The
10% Rule
Invest
10% of your gross income until you retire.
Gross income
is your income before taxes, insur-ance, etc. is withheld from
your paycheck.
|
If you follow this
simple rule, you will have more than enough money to enjoy your
retirement years. The simplest way to use this rule in today's
finan-cial world is to set up one or more mutual funds with monthly
automatic deposits. If you want to further enhance your future, make
sure your mutual fund accounts are tax-deferred [e.g., an Individual
Retirement Account (IRA) or a 401(k) account]. Finally, if 10% is more
than enough, then twelve or fifteen percent will be even better.
Consider the following example:
|
