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Turn $1,000 of Your Kid's Savings Account into $168,700By
Monday, August 9, 2010
How would you like to turn $10,000 into $178,200 using an investment strategy that takes no work, skill... or even attention?
Even better, how does a $168,700 stake from an initial investment of $1,000 sound?
There's only one investment technique I know that's mathematically certain to build fortunes like these from small starting positions.
Not only is this technique sure, but it's also easy, cheap, and anyone can do it – even a child. I'm talking about compounding...
You invest your money in something that pays you a return in the form of dividends, interest, or profits. Then you reinvest your dividend or interest income back into the investment. Now your dividends are earning dividends and your interest is earning interest. You are "compounding" your gains by reinvesting your profits.
A snowball is the best analogy for compounding. When you first roll the ball in the snow, it gains mass slowly. But as the surface area increases, it picks up more snow. Suddenly the ball is so heavy you can't move it anymore.
Time is the most important ingredient in compounding. The more years you give it, the more your money mushrooms. Here's how it works...
Let's say at age 40, you invest $5,000 at 8% and reinvest the income. At age 65 you'll have $34,000. If you'd made the same investment at age 20, you'd have $160,000 by the time you turn 65.
Besides time, you also need a safe investment that generates a reliable return...
Blue-chip stocks are one of my favorite investments for harnessing the power of compounding. Blue chips are the giant oak trees of capitalism. They dominate their industries with powerful brand names, recession-proof products, and huge marketing budgets that keep out all other competitors.
Over the last century, buying blue-chip stocks that raise their dividends year after year has compounded your money faster than any other passive investment technique in the universe. Warren Buffett – the most successful investor in history – essentially used a blue-chip compounding strategy to return 20% a year for almost 50 years. He's now worth $50 billion.
This table shows what happens to your money if you'd invested $10,000 in Microsoft, Wal-Mart, ExxonMobil, and McDonald's on December 31, 1986, a few months before the Wall Street crash. (I could have used Johnson & Johnson, Procter & Gamble, Coca-Cola, or Philip Morris, and the results would have been just as good.)
To make the most of compounding, you should make regular payments. If you'd invested $5,000 every year at 8%, starting at age 20 and reinvested the income, you'd have almost $2 million by age 65.
Direct investment plans, or DRIPs, let you do this. Many companies sell stock to the general public directly. They let you invest in their stock – and reinvest your dividends – without paying broker commissions.
More importantly, when you buy stocks using direct investment plans, you can make regular automatic investments in these stocks, every month, quarter, or year, without incurring broker fees.
If I were going to set up a blue-chip compounding portfolio right now, I'd probably start with Microsoft, Exxon, Wal-Mart, and McDonald's. These stocks will pay bigger and bigger dividends over the years to come. And they're cheaper than they've been in years. Microsoft, for example, is at the same price it was in 1998... and you can still buy Wal-Mart at 1999 prices.
All you need to do is make regular investments in these blue-chip stocks and watch your money compound into a million-dollar fortune over the next 30 years.
Good investing,
Tom
Further Reading:
Legendary investor Jim Rogers has a different twist on how to use time to amass your fortune. He says, just do nothing – most of the time: "Take your money, put it in Treasury bills or a money-market fund. Just sit back, go to the beach, go to the movies, play checkers, do whatever you want to... Then something will come along where you know it's right." Read more here: Jim Rogers' Trading Secret.
One of the greatest benefits of learning how to use time to your advantage is that no one else does. As Dan Ferris explains, patience is now the No. 1 Advantage You Have Over the Average Investor.
Market NotesNEW HIGHS OF NOTE LAST WEEK
Ecopetrol (EC)... Columbian oil
Pacific Rubiales (PRE.TO)... Columbian oil
Deere & Co. (DE)... farm and construction equipment
Las Vegas Sands (LVS)... casinos
Enbridge (ENB)... pipelines
TC Pipelines (TCLP)... pipelines
Copano Energy (CPNO)... pipelines
Inergy Holdings (NRGP)... pipelines
Quicksilver Gas Services (KGS)... pipelines
El Paso Pipeline Partners (EPB)... pipelines
Plains All American Pipeline (PAA)... pipelines
Magellan Midstream Partners (MMP)... pipelines
Crocs (CROX)... shoes
Hansen Natural (HANS)... beverages
NEW LOWS OF NOTE LAST WEEK
Washington Post (WPO)... newspapers
DeVry (DV)... secondary education
Apollo Group (APOL)... secondary education
Lincoln Education (LINC)... secondary education
Corinthian Colleges (COCO)... secondary education
American Public Education (APEI)... secondary education
Chico's FAS (CHS)... women's clothing
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