How To Turn $100,000 into $98,361 in Six Years!
I just read a good article in one of the trade magazines I subscribe to. The article, by Mike Dubes was called "A Marathon, Not a Sprint."
The article is about somebody that gets really aggressive with his retirement portfolio. And it paid off for him......at first. His first year return got him 48%. But it wasn't so steady after that. The following years were:
Year 2 -42%
Year 3 +36%
Year 4 -25%
Year 5 +37%
Year 6 -18%
Looks okay, but the hypothetical $100,000 he started with at the beginning of year one now equaled $98,361 at the end of year six. How is that possible? The power of compounding. After year one's massive 48% return, he was sitting on $148,000. So when he lost 42% the following year, he lost 42% of $148,000, not 42% of $100,000. So his balance at the end of year 2 was $85,840. Doh! And when he gained 31% the 3rd year, he earned 31% on $85,840, not $100,000. And so on and so on....
The overall concept was that if he would have stuck his money in something earning 6% per year, his balance after year 6 would have been $141,852.
The moral was that the road to retirement is a marathon....its long and we have to pace ourselves. So just because we only earned 6% one year, probably won't kill us in the long run. I struggle to remember this sometimes. I'm still shooting for 10% which I think is reasonable, but I'll try to leave visions of 40% returns out of my head.
posted by Please Read @ 6:54 AM
7 comments
7 Comments:
Very good post, seeing people get returns such as 40+% on their investments is what gets many people to invest into riskier things. The marathon approach is a good way to look at it even if it doesn't give us the satisfaction of the quick fix.
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Good luck!
I commented last week on your 401k post. This is also a good post. This is just math...which many people overlook.
Two points:
1. find me something 6 years ago that would pay me 6% per year that involved little or no risk.
2. Do whatever it takes to avoid losses. Nothing wrong with being aggressive, just know when to get out of something and not let small gains (or small losses) turn into large losses.
It is the years of negative returns that kill everyone. If you lose 10%, you need 12% to get back to even. If you lose 25%, you need 33% just to get back to even. If you lose 48% on something, well, you need almost 100% JUST to get back to where you started. This forces people to either give up completely or take more risk.
Keep posting. Thx, Tom
Matt - You said it perfect "Quick Fix" is what we are all looking for and it is the hardest thing to avoid sometimes!
Tom - Thanks for the comments. I agree with you. I don't mind being agressive but you have to be smart about it.
very true. stick to stocks paying a 5% dividend and expecting a 5% earnings growth and you'll do just dandy in the long run!
This is a great perspective. We should always keep the long run results in our view while investing in our nest egg.
Thanks for the great post once again.
Cheers
FIREFinance
I agree with Tom
"2. Do whatever it takes to avoid losses. Nothing wrong with being aggressive, just know when to get out of something and not let small gains (or small losses) turn into large losses."
Is not about not taking risks, but rather controlling your risk. "Let Your Profits Run - Cut Your Losses Short"
Phantom1024
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