Friday, May 9, 1997
[Today we revisit a Fribble from July 1996.]
Send in the
Clown
By TMF Sheard
We've neglected one of our favorite jesters of late, and it's time to pay him some attention before he gets despondent. I'm talking, of course, about the old Compounding Clown.
This is the Fool who trots on stage every once in a while to show us how the long-term picture would look if we can be patient and let the investor's best tool -- time -- work for us. Let's look at a couple of acts in the Compounding Clown's drama.
Act I (in which the Compounding Clown wakes up only once a year).
We've talked about the Dow Approach many times in our Fribbles. And the 22% returns are becoming more and more well known. But what does that kind of a return really mean for your account over time?
Let's assume you have a $25,000 IRA (if you want to calculate the taxes in a regular account, look to my other Fribbles on taxes for some help). You're 25 years from retirement and all you want to do is update your portfolio once a year, so you opt for the Foolish Four approach. Trot out the Clown to do his little dance -- drum roll, please. After 25 years of dancing, the Compounding Clown took your $25,000 and turned it into $3.6 million. Exit stage beach!
Act II (in which the Compounding Clown comes out a little more often, but smiles a bigger smile.)
For the second act, let's assume you're willing to dance a little more nimbly with a growth strategy as well as the Dow approach. You've been a real Fool and have generated two percentage points a year more than the Dow Approach.
Enter the Clown again with his 24% returns over 25 years. In this act, the Clown takes your $25,000 IRA and turns it into, not $3.6 million as in Act I, but $5.4 million. That's right. An additional $1.8 million from the same starting stake, just by picking up 2 percentage points a year. Way to go, Clownie!
Act III (in which the clown closes the show with a heart-stopper).
As the curtain rises for the final time, the Compounding Clown pulls out the big cannon, the last straw, the real deal, the cliche of all cliches. Not 22%. Not 24%. But a full 26%! If you've been a growth-oriented Fool, maybe you've been good enough to pull off such a feat. If not, give yourself something to shoot for anyway.
$25,000 for 25 years in an IRA growing at 26%. The curtain rises, the Clown smiles, and voila, your retirement fund has grown to $8.1 million! I don't know about you, Fool, but I think I could struggle by on $8.1 million. Heck, 99% of all Americans would be ecstatic to retire with our original $3.6 million. The problem is, most don't believe they can get there, or don't know how.
The answer, of course, is time, discipline, and patience. It is possible, Fool. Make it be so.
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