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Power of compounding is a simple concept that means the longer and the more you invest, the higher the potential reward on your money, since your money compounds over time. Compounding is a process that allows interest to earn interest upon itself.
For example, if you start with $1 and you receive 100% interest every day, you will have $2 the next day, and $4 the day after and so on. In about 21 days you will have $1 million. No wonder compounding is such an awesome strategy. Of course, your money won’t double every day even with compound interest, but here is a rule that can help you easily figure out how long it will take to double your money.
Rule of 72: Take the number seventy-two and divide it by the percent of interest or rate of return of your investment to find how long it will take to double your money.
For example, if you invest in stocks, historically, your rate of return would be 11%. This means if you stay in the market for the long run, your money will double every 6½ years: 72 ÷ 11 = 6.5.
Kids, time is on your side, so start now. Go to the financial goals calculator to determine when you will achieve your goals. Of course, this calculator will also help you map the strategies for your investments goals.
A proven profitable strategy that can help long-term investors is called dollar cost averaging (DCA). If, every week, month, or year, you put the same amount of money into stocks, you will notice a strange thing happening. You will have bought more stock at lower prices, and less stock at higher prices, exactly what you're supposed to do as a good investor. Also, you will have taken the emotion out of investing since you did not watch the market, but merely bought stock regularly.
Another important strategy is the dividend reinvestment plan (DRIP). The important letters are "R" and "I,"which stand for ReInvestment. With DRIP, you can start with a share of stock. Under this plan, you arrange with the company to use all bonuses (dividends) to buy more shares without paying a broker’s commission.
The more shares you have, the more dividends you will get. The more dividends you get, the more new shares you can buy. The loop does not end until you sell your stocks. With DRIP, your stocks build up quickly. Of course, you do not have to be a math whiz to see why DRIP works. If you want to see a mathematical demonstration using DCA, click here.
Investing internationally is another strategy that can be profitable, since currently there is strong growth in other parts of the world. From 1985 to 1994, the U.S. stock market represented by the S & P 500 index grew 285%, but seventeen other foreign stock markets did even better. This list includes Austria, Hong Kong, Ireland, and France just to name a few.
The world is much closer because of the Internet. Kids can collaborate internationally over the Internet when investing in foreign markets. In global investing, computers can bring down barriers, but not the potential risks including political, economical, and currency uncertainties. Do your homework in any foreign market before you invest. Meeting a friend on the Internet would help.
Alternatively, you can invest in global mutual funds or in a new investment vehicles called country baskets, mutual funds families investing in a specific foreign country. Right now, nine countries have country baskets trading on the New York Stock Exchange (NYSE). If you are interested in country baskets, call 1-800-482-3940 for additional information.
Another new investment vehicle for foreign countries is called World Equity Benchmark Shares (WEBS). These are also mutual funds for stocks in other countries. Like country baskets, it has lower costs than normal mutual funds. Now, seventeen countries have WEBS trading on the NYSE. For more information on WEBS, call 1-800-810-9327.