The Dow Approach
The Dow Approach
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FOOL GLOBAL WIRE LEXINGTON, KY. (January 16) -- One of the most frequently asked questions about the Dow approach is how one should go about adding to a portfolio over time. And this is one of my favorite questions because there are a number of answers, and all of them are exciting since putting new money to work just brings on the compounding clown more dramatically. To show how dramatic the difference can be, let's compare two portfolios. One deposits $2000 in an IRA and then does nothing with it except the Dow approach annually for 40 years. Assuming a 23% growth rate (the historical rate for the last 25 years), that $2,000 will grow to an astounding $7.9 million. Now compare that to a portfolio with an annual addition. Let's keep it in an IRA for simplicity and add $2000 a year every time you update the portfolio. Achieving the same 23% return each year, but adding the IRA limit of $2000 on each anniversary, this portfolio soars to $42.2 million! Amazing, huh? So, how do you go about adding new money? Well, setting up an IRA and adding $2000 each year is a simple way. Saving that $2000, only $167 a month, is a relatively tiny investment for a potential retirement portfolio of more than $40 million, don't you think? What about outside an IRA? You can set up multiple Dow portfolios at 3-, 4-, or 6-month intervals if you can afford the commissions. That way every few months you have a Dow portfolio coming due for renewal, at which time you can add new money. As long as your initial start-up costs for a new portfolio are under 2.5% of your investment in that portfolio, you're doing fine. And there's always the idea of setting up Dividend Reinvestment Plans (DRiPs) where you can buy shares directly from the company and by-pass the brokers completely. In short, it's a win-win proposition to think of your stock portfolio as a lifelong savings vehicle, not just a speculation on the prospects of a company or two. Literally anyone can create wealth with some patience and a consistent desire to save. You don't have to be born wealthy to make yourself so. Nor do you have to make a 7-figure salary. What you need is to get started and keep adding to your savings as often and as generously as you're able. Set to, Fool! |
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