| -- Grow your money whether the market goes up or down... -- Buy stocks at discount in some cases... -- And possibly even turn a small amount of money into a sizeable retirement nest egg -- without adding any additional money from your own pocket. Let me explain... Compounding: The Great Secret To Lasting Wealth First, in order to grasp how powerful this is, you may have to change the way you think about investing. Most people believe investing is a crap-shoot. You win some, you lose some. Stocks jump up and down, and it's your job to get the most out of this rollercoaster ride by timing the market. Wrong. Today, I want you to forget all that. Instead, think of the stock market as an opportunity to grow your wealth no matter what's happening in the world. High interest rates or low interest rates... inflation or deflation... war in the Middle East or tension between superpowers... whatever's going on, you can grow your retirement nest egg. And you don't have to worry about timing the market. How do you do this? By letting your dividends work for you. In other words, you can use your dividends to protect yourself from market volatility and from the disruptive macroeconomic events. And the easiest way to do that is by letting them compound... Compounding is one of the great investing secrets. It doesn't get much attention because it doesn't have a catchy name, and it won't happen overnight. But it's a key factor that helps the rich get richer. If you're not using compounding, then it's going to be hard for you to earn lasting wealth. You'll be dependent on timing and playing the market as if it were a lottery. That's a loser's game. Here's how powerful compounding can be... If history is any guide, you can expect your investments to grow 4%, 6%, or even 8% annually. A 6% gain on a $50,000 portfolio may not seem like much, but 6% year after year on an ever-rising base of assets starts to really sizzle. That's compounding in a nutshell. Some tend to think of compounding more when it comes to savings accounts or other interest-bearing items. But it also works with investments. Suppose you set aside $6,000 this year (assuming you're 40 years old in this example). In addition to the 6% gain on the first year's investment, let's suppose you put in another $6,000 in the second year. Keep it up for five years and you've bagged $3,800 in gains in addition to the $30,000 you've put in. A Decent Gain | Age | Balance | | 40 | $6,000 | | 41 | $12,360 | | 42 | $19,102 | | 43 | $26,248 | | 44 | $33,823 | Now let's say you keep it up for another 10 years, picking up 6% annual gains on the nest egg along with another $6,000 in freshly injected funds each year. Now compounding is really starting to pick up. You've put in $90,000 ($6,000 a year times 15 years), but also have a nearly $50,000 gain to show for your efforts. Getting Better | Age | Balance | | 45 | $41,852 | | 46 | $50,363 | | 47 | $59,385 | | 48 | $68,948 | | 49 | $79,085 | | 50 | $89,930 | | 51 | $101,220 | | 52 | $113,293 | | 53 | $126,090 | | 54 | $139,656 | The next 10 years, your results are better still. You've now put in $150,000 ($6,000 a year times 25 years), but made even more than that in profits. When you're looking at 6% gains on $300,000, you're talking about stellar gains. Better Still | Age | Balance | | 55 | $154,035 | | 56 | $169,277 | | 57 | $185,434 | | 58 | $202,560 | | 59 | $220,714 | | 60 | $239,956 | | 61 | $260,354 | | 62 | $281,975 | | 63 | $304,893 | | 64 | $329,187 | And if you stick with it for 10 more years, you'll now be sitting on a really impressive pile of cash. By the time you hit 74, you'll be bagging nearly $40,000 in annual gains -- far higher than the $6,000 you've been injecting each year. Strong Annual Returns | Age | Balance | | 65 | $354,938 | | 66 | $382,235 | | 67 | $411,169 | | 68 | $441,169 | | 69 | $474,349 | | 70 | $508,810 | | 71 | $545,339 | | 72 | $584,059 | | 73 | $625,103 | | 74 | $668,609 | What's more, compounding also gives you more time to enjoy life. You don't have to be glued to the finance channels looking for the next "hot" stock. And you don't have to worry about what's going on in the Middle East, China, or Europe -- you're portfolio is largely unaffected by all that. Compounding can have a profound effect on your net worth. Yet too few people seem to grasp this concept. The other thing investors need to understand is that the easiest way to benefit from compounding is by reinvesting your dividends. Use Dividend Reinvestment To Start Compounding Dividend reinvestment is amazingly simple, yet tremendously powerful. Here's how it works... Instead of cashing your dividend checks every month or quarter, you simply plow them back into your investments to buy more shares. Those dividends then turn into more dividends, which turn into even more dividends, and so on and so on... and you don't have to pay a nickel out of pocket to buy them. For example, say you own 1,000 shares of Verizon, which currently pays a $2.56 annual dividend. You'll make $2,560 (1,000 shares multiplied by $2.56) in annual dividend payments. However, if you reinvest that $2,560, it will go straight towards the purchase of more shares. At today's prices, that will get you roughly 47 more shares. So by year's end, you will own 1,047 shares... more than you started out with, and you won't have to pay a dime for them. And the $2.56 dividend, multiplied by the now higher number of shares you now own (1,047), means next year's dividend payments will rise to $2,680 (1,047 shares multiplied by $2.56). Again, your dividend income grows... and it doesn't cost you anything. As long as the company keeps paying its dividend, this continues every year, with each year's dividend pile larger than the previous year's. The Easiest Way To Create Long-Term Wealth Keep in mind, this scenario doesn't even take into account additional purchases of shares through new contributions or any future appreciation, like the first example I showed you. In an ideal world, you're reinvesting dividends in a handful of names in your portfolio, making future contributions, and enjoying steady compounding long-term returns. Either way you look at it, compounding is a simple but powerful notion. And if you start today, you'll be at the start of a long virtuous cycle that boosts your portfolio value with each passing year. Unfortunately, many investors don't look at their portfolios this way. They want to sore big-time wins and get rich overnight. And while there's certainly a time and place for that, it shouldn't be the main strategy you employ with your portfolio. On a similar note, if you own dividend payers in your portfolio -- and plan to own them for the long haul -- then you should seriously consider reinvesting dividends. (Many brokers offer automatic dividend reinvestment. If you don't know how to do this, don't be afraid to ask your broker.) If you don't need the money right away, it just might be the smartest (and simplest) thing you can do to set yourself up for success. Editor's Note: If you want to build true, lasting wealth in the market, then you need to own dividend-payers that can hold up no matter what the market throws at them... In my latest report, I profile 5 of my favorite "Bulletproof Buys" that have weathered every dip and crash over the last 20 years and STILL handed out massive gains. If you want to build a safe, high-yielding portfolio that can compound and throw off thousands of dollars in extra income every year, then I can't think of a better place to start. Go here to check it out now. |
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