Value of Investing
We have all heard that we can become millionaires if we put a few dollars a day towards savings. The benefits of long-term compound growth are becoming well known. If you invest $1,000 for 10, 20, or 30 years, you would earn the following depending on the rate of return:
However, it is important to understand how inflation affects your return, that a dollar today will not have the same buying power in the future. Taking inflation into account (at 3%), the investments above will have the following buying power in today's dollars:
There are two things to note.
It is also important when trying to maximize the return on your investment, to watch out for investment management fees. Some of these fees can be as high as 2% to 3% or can be as low as 0.25% in some indexed funds. Some managers would argue that these higher fees are justified because they can offer a better return by selecting the hot sectors in the market. Some studies have refuted these claims and have shown that most managers can not out-perform the market when their investment management fees are removed from their total return, in other words what is their return to the investor. I will discuss this more in a later article.
A 2% fee may not sound that much. However, over time it does add up. After thirty years, avoiding a 2% management fee could increase a portfolio by over 70% :
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