Make money, save money, invest, and… this fourth step will help you grow your investments in the long run! [Wednesdays: The Independent Investor]
Miles Everson’s Business Builder Daily speaks to the heart of what great marketers, business leaders, and other professionals need to succeed in advertising, communications, managing their investments, career strategy, and more.
A Note from Miles Everson:
Investing is an important activity that I believe each one of us must learn regardless of the career path or industry we are in. For me, this is one of the vehicles that will help us grow our monetary wealth and build our financial future.
In the “Build Your Financial Future” webinar, Professor Joel Litman, President and CEO of Valens Research, discussed four important steps to achieve financial freedom. The first, second, and third steps were discussed in our past articles.
Today, we’ll talk about the fourth and last step that will help you grow your financial wealth.
Are you interested to know what this is?
Keep reading to find out.
The Independent Investor
In our past “The Independent Investor” articles, we talked about the first three steps towards achieving financial freedom.
Step 1: Make money.
Step 2: Save money.
Step 3: Invest.
We hope you’ve learned a lot of great insights from these articles so far!
Today, we’ll talk about the fourth and final step in growing your monetary wealth and building your financial future. That step is…
―the action of putting the money you earn from an investment bank into that same account or into another investment vehicle.
In his “Build Your Financial Future” webinar, Professor Joel Litman, President and CEO of Valens Research, said the reinvest portion of growing your monetary wealth is important.
For him, this boosts your entire portfolio because you’re not just living off the dividends in the stock market.
Example: Let’s say you receive your dividend from a certain investment. If you simply put it in a savings account instead of reinvesting that dividend into the ETF (exchange traded fund), you lose a MASSIVE amount of performance.
According to Professor Litman, savings accounts and bonds have low interest rates and poor returns. That means no matter how big your reinvestment is, it won’t get bigger over time in these specific investment vehicles.
Unlike if you reinvest in the ETF, your dividend will compound and eventually lead to greater dividend income down the road.
Why should you reinvest your dividends?
The primary reason for reinvesting your dividends is it allows you to buy more shares in the stock market and build wealth over time. If you calculate your returns 10 or 20 years later, you’ll find out that reinvestment more likely increases the value of your investments than if you simply took the cash or put it in a savings account.
Here are a few more benefits of reinvesting your dividends:
- Compound―Sometimes Double Compound―Growth
Reinvesting allows your dividends to continuously grow because after every dividend payout, you earn more shares. This is because both the number of your shares from reinvestment and your dividends per share are growing.
Additionally, if you own a stock that’s consistently raising its dividends, your dividends per share will also increase ON TOP of the increase in your number of shares!
Simply said, the exponential power of compounding will provide competitive returns for your investment portfolio.
- No Commissions
Reinvesting your dividends is an efficient way to add small amounts of shares to your investments. Another great thing about this?
You won’t owe any commissions or other brokerage fees when you buy more shares!
- Easy and Automatic
Once you set up your reinvestment and make it your permanent option, your broker will automatically reinvest your dividends on every stock in your account. It’s that easy and convenient! If you consistently do that for 10+ years, you’ll grow your investment value over time.
Let’s take a look at an example of reinvestment growth to help you understand the advantages of this investment vehicle:
Company X pays a dividend rate of 50 cents per share. The stock price increases by 10% each year and the dividend rate moves up by 5 cents each year.
Number of Shares: Investment amount ÷ Stock price
Dividend Payment: Number of shares × Dividend rate
During the first year, you invest USD 20,000 when the stock price is USD 20. At the end of that year, you have 1,000 shares (20,000 ÷ 20) and a dividend payment of USD 500 (1,000 × 0.50).
You reinvest your dividend payment during the second year. Since the stock price has increased to USD 22 and the dividend rate is at 55 cents per share, your reinvestment buys an extra 22.73 shares (500 ÷ 22) for a total of 1,022. 73 shares (1,000 + 22.73). At the end of that year, your dividend payment grows to USD 562.50 (1,022.73 × 0.55).
Similar to what you did in the previous year, you reinvested your dividend payment. Since the stock price is now at USD 24.20 and the dividend rate is at 60 cents per share, your reinvestment buys another 23.24 shares (562.50 ÷ 24.20) for a total of 1,045.97 shares (1,022.73 + 23.24). At the end of that year, your dividend payment grows to USD 627.58 (1,045.97 × 0.60).
See how your dividend payment and stock market shares grow in just a span of 3 years through reinvestment? Imagine doing that for 10 years or so. You’ll probably have over USD 1,000 dividends, more than 2,000 shares, and USD 30,000+ investment value by then!
According to Professor Litman, good investing is boring. It’s similar to how American economist Paul Samuelson described good investing as “watching and waiting for paint to dry or for grass to grow.”
If you find investing entertaining or you’re always having lots of fun while doing it, you’re probably not making any money over the long run.
It’s because good investing always takes time, patience, research, and deliberate decision making. In a past “The Independent Investor” article, we even discussed how being slow and steady wins the investing race.
It’s also good to have reinvestment as another investment vehicle to help build your financial future. This helps you grow your money more than if you pocket your dividends and solely rely on capital gains to generate wealth.
As long as the companies where you or your portfolio manager bought stocks continue to thrive and your portfolio is well-balanced, reinvesting will significantly benefit you for a long period of time.
Consider reinvesting to build your financial future!
As Professor Litman said, this will not only change your life and your personal wealth but will also change the entire wealth of your family for 2 to 3 generations.
Take note of these 4 steps towards achieving financial freedom―Make money, save money, invest, and reinvest!
(This article is from The Business Builder Daily, a newsletter by The I Institute in collaboration with MBO Partners.)
About The Dynamic Marketing Communiqué’s
“Wednesdays: The Independent Investor”
To best understand a firm, it makes sense to know its underlying earning power.
In two of the greatest books ever written on investing, the “Intelligent Investor” by Benjamin Graham and “Security Analysis” by David Dodd and Benjamin Graham (yes, Graham authored both of these books), the term “earning power” is mentioned hundreds of times.
Despite that, it’s surprising how earning power is mentioned seldomly in literature on business strategy. If the goal of a business is wealth creation, then the performance metrics must include the earning power concept.
Every Wednesday, we’ll publish investing tips and insights in accordance with the practices of some of the world’s greatest investors.
We make certain that these articles help you identify and separate the best companies from the worst, and develop your investing prowess in the long run.
To help you get on that path towards the greatest value creation in investing.
Hope you’ve found this week’s insights interesting and helpful.
Stay tuned for next Wednesday’s “The Independent Investor!”
Head of Marketing
Valens Dynamic Marketing Capabilities
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