Tuesday, March 27, 2007

Compounding Continued - beating the market by a few extra points

In an earlier post we discussed the power of compounding. Let's look at the same data a little bit differently.

The table below shows what an initial investment of $10,000 becomes in 10, 20, 30, and 40 years at different annual rates of return.

For example: At 10% annual rate of return, an initial $10,000 investment becomes $174,494 in 30 years.

Note the value of beating the market averages just by a little bit over time. At a 12% annual return that same investment becomes $299,599 in 30 years. At a 15% annual return that investment becomes $662,000 in 30 years. I happen to think a focused small investor can beat the market averages and see long term expectations of 12-15% as reasonable goals. My personal goal is 15%.

Bottom line A) - especially if you're young and time is on your side - the next time you want to spend $10,000 vs. saving think of this example. Effectively, the younger you are the more expensive spending is.

Bottom line B) - it is so worth it to try to understand your investments and find a way to beat the market averages over extended periods of time.

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