<FOOLISH WORKSHOP>

A Habit of Investing

by Jim Stevens ([email protected])

Burlington, VT (Jan. 11, 1999) -- One of the more common questions about the Workshop approaches is how to add new money over time. There are a number of ways, of course, but the fun part about answering the question is the visions of future wealth that are stirred by seeing what compounding can do to a portfolio with regular additions.

Plain old compounding is simply amazing, even Albert Einstein was in awe of its power. If an investor started with just $2000 in an IRA on her 25th birthday, then was able match the Keystone 10 returns of 25% per year until she retired at age 65 -- never adding one thin dime -- she'd be sitting on a cool $12.03 million. Not bad right?

What happens when regular additions of "new money" are factored in? Hold on! Take the same twentysomething investor with her same $2000 IRA and 25% annual return, now throw in an annual contribution of $2000. My calculations come out that when she hits 65 this time, her brokerage account will have ballooned to right around $60 million!

Now back to the question, how do you add regularly to a Foolish Workshop portfolio? Saving up $2000 and adding it to an IRA once a year is the simplest way, and who would have thought that putting aside less than $40 a week might get you within three zeroes of Bill Gates' fortune?

Got more than $2000 a year? Well, the Workshop is abound with ideas on ways to put new money straight to work:

-- Monthly Updates. This is a simple one, if you update all or part of your portfolio monthly, new money can simply be added in and spread evenly across the new positions that are purchased each month.

-- Dozens. Just as simple. A new position is purchased each month the first year and subsequently traded 12 months later in rotation. Each month, new money is used to buy a new position the first year. After 12 months it can be lumped in with each stock's proceeds as they are traded month after month.

-- Margin. If you've already built up some investment dollars and are buying a basket of stocks with the intention of holding them for a year, then a conservative level of margin (10-20%) is an option. What you do is sort of "pre-invest" your planned additions when you make your annual update by borrowing funds from your broker. Your own money, as well as what you've borrowed, gets the full effect of market returns or losses. Monthly additions go to repay your margin loan and the interest. Margin investing is not for everyone -- while it has the potential to magnify your portfolio's gains, any drawdowns will cause larger percentage losses as well.

There are many other ways to add money to a portfolio, these are just some of the popular ones I've seen discussed on Foolish Workshop Message Board. The cool thing is how this can get an investor to realize that you really don't have to be born rich, win the lottery, or land a six-figure job to get rich. You just have to get started. Get Foolish!

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