Find out in this article.
2. Investing is like playing the stock game. So what is it?
This is a question that most of us have heard or even seen people ask when making investment decisions. For starters, we have to consider that all investments require money to buy and sell. This means we must make decisions about the direction of our capital investment, as well as when it will be necessary. The financial statements of companies have a lot of numbers related to the capital that is invested and we have to account for these numbers in our investment portfolios.
The market fluctuates and the economy improves or declines to varying degrees. These things effect your portfolio value. To illustrate, let’s look at two different investments that I own as an investor: (1) a dividend yielding bond fund with an expense ratio of 1,000, and (2) a dividend-paying fund with an expense ratio of only $100.
If I invest $1,000 per year for the next 10 years into a dividend-bearing fund with interest rates that are higher than 0%, then the return I will achieve is 0.01%, which is only marginally better than my current portfolio. Now let’s say I am interested in a low-cost fund for the rest of my life. In the best investing scenario, I will make 1% return per year, so I will want to put all of my money into low-cost funds. How much would it cost to buy a low-cost bond fund, invest in it for 10 years, pay $100 monthly (1% per year) for that year, and then sell the same bond fund for $1,000 after 10 years?
Let’s divide that $1,000 by 10 and see how it works out:
$1,000/1,000 = $12.30
0.01% / $1,000 = 2.60% (3% over 10 years)
So if I get 0.01%, the return would be 5%, or $12.30. The next year, it would be 6.80%, and the result would be 10.30%, or $14.30. It would take until the next year to reach 10.30% after I sold in the best investing year after the initial decision. If I invest $1,000 each year until the 20th year to build up funds with low-cost and high-return bonds, I will make 6.60%, which
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