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The Power of Starting Early
and Reinvesting Dividends
Once you establish
a foundation for your investment, you can help it grow by reinvesting
any income dividends and capital gains your mutual funds pay you right
back into the market. Compounding may produce dramatic results over time.
The sooner you begin
investing, the more time you'll have to take advantage of the power of
compounding. In fact, by investing early, you have the potential to invest
less money – and yet earn considerably more – than
someone who waits to invest.
Here's an example
illustrating the difference that starting early makes. Two friends, Greg
and Sue, invest $2000 a year – but at very different times. Sue
gets an early start; she invests actively for eight years and reinvests
all her earnings, but then stops. After that, she continues to grow her
investment purely by reinvesting any earnings and letting them compound.
Greg, on the other
hand, puts off investing; he's only starting to invest when Sue is finishing
her active investment years. Greg invests actively for 32 years, compared
to Sue's eight years.
Yet, you can see
from the chart below that Greg earned considerably less than Sue, even
though he actively invested four times as much time!
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Sue
(started sooner)
Total Investment: $16,000
Total Earnings: $515,188
Total Account Value: $531,188
Sue invested $2,000 a year for 8 years
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Greg
(invested more)
Total Investment: $64,000
Total Earnings: $378,496
Total Account Value: $422,496
Greg invested
$2,000 a year for 32 years |
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This chart assumes a 10% annual rate of return. It is for illustrative
purposes only and is not indicative of the Armada Funds' results.
Actual investment returns and principal values will fluctuate. Total
earnings and account value assume no taxes have been taken out -
this would be possible with a Roth IRA account if you follow IRA
rules (consult a tax specialist if you have IRA questions). Past
performance is no guarantee of future results. |
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