compound interest

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Spreadsheet Math: Two Investments Walk Into A Classroom…

Ok, not the best title but let’s run with it. Let’s start with a question:

You have a choice between two investments of $100,000:

  • Investment #1: Earns a consistent 8% return every year (put aside the fact that an investment like this doesn’t exist at the current time; it’s been a while since you could buy a 30 year Treasury Bond with that kind of return).
  • Investment #2: Has an average return of 8% per year but has “lumpier returns” aka it has more volatile returns but the returns each year are in the top 10% of fund returns. Some years it is up, some years it is down, but overall it averages the same 8% return as Investment #1.

Which investment has a higher balance at the end of the 20 year period?

What If…You Had Invested With Warren Buffett in 1965?

Interesting thought experiment (wishful thinking!) that demonstrates the power of compound interest and also that getting the market return over a long period of time hasn’t been a bad strategy either.

Warren Buffett is out with his annual letter for 2016  which is a must-read for investors because of the common sense, homespun advice from the best investor of our time. For those not familiar with Mr. Buffett’s investing prowess, check out the first page of his report which has performance data on his holding company Berkshire Hathaway Hone in on the Compounded Annual Gain (CAG) number at the bottom of the first page and check out the middle column, Per-Share Market Value, and you will see that his CAG from 1965 – 2016 has been 20.8%. Let’s have some fun with an investment calculator and pretend that you were Warren’s neighbor in 1965 and decided to invest $1,000 with Warren (equivalent to $7580 in today’s dollars) AND have continued to hold onto that investment.

Care to guess how much that $1,000 investment in 1965 compounded at a 20.8% rate annually for over 50 years amounts to?

By |February 28th, 2017|Activity, Chart of the Week, compound interest, Current Events, Investing|

Question: What Percentage Of Workers Contribute To a 401(k) Plan?

Answer (courtesy of Bloomberg): About 1/3

Why is this important?

Pensions are becoming increasingly scarce for young people, so the 401(k) will likely become the primary source of financial support for retirees outside of Social Security:

According to a Pew Charitable Trusts analysis of survey data released Feb. 15, only 10 percent of workers over age 22 have a traditional pension. Just 6 percent of millennials have a pension while 13 percent of baby boomers do.

Why are so few contributing to their 401(k)? Here are a few theories:

Ways To Make Investing Simpler

I have been thinking a lot about this issue of how to make investing simpler. I hear from teachers that this is a real pain point for them. I can see in the NGPF podcast stats that the most popular guests tend to be conversations about investing (Mike Finley, Jonathan Clements and Vanguard’s Jim Rowley to name a few). Then this weekend the lightbulb went off. I was heading to the coast listening to Charlie Ellis on the Masters In Business podcast (kinda dorky I know). Those of you not familiar with Charlie Ellis, he is probably the best investment management thinker you have never heard of. Charlie has played a role in two of the juggernauts of modern day investing, the Yale endowment and Vanguard Investments (the king of indexers just crossed $4 billion (I mean TRILLION!)). Oh, and he was an early investor in Berkshire Hathaway too (Warren Buffett’s company)!

Lesson: What If You Only Had An Hour To Convince Your Students to Save?

Earlier this month, we had the opportunity to get back into the classroom at Eastside Prep in East Palo Alto, California (where I came up with the idea for Next Gen Personal Finance). We’re teaching seniors all they need to know about personal finance over 6 weeks (24 hours of content) including lessons on savings and checking accounts, taxes, budgeting and investing. We’ll be releasing this 24 hour curriculum later this spring to help those educators who only have a limited time to spend on personal finance.

Our first savings lesson focused on four learning objectives:

  • Importance of saving
  • Power of compound interest
  • Understanding different types of savings accounts
  • How to make saving automatic

Here is a summary of this lesson which will be part of a 24 hour curriculum that Sonia is currently packaging and will release later this spring. I provide this summary in case you are teaching savings now and looking for some ideas to supplement what you are currently doing:

By |January 29th, 2017|Activities, compound interest, Lesson Idea, Savings, Teaching Strategies|

NGPF Product Launch: NGPF Releases Revamped Savings Unit

I am so proud of the NGPF team (Jessica, Sonia, Laura, Ren, Sid and Niko) that has worked feverishly to deliver a revamped Saving Unit that we released tonight. Why do we continue to revamp our lessons? The short answer can be found in our culture of continuous improvement as we are always looking for ways to make our lessons stronger (your feedback is critical in this process). Here is the longer answer: 

NGPF Podcast: Tim Talks to Allan Roth, Author, Columnist and Financial Advisor


Thanks to Allan Roth for recently joining the NGPF podcast. I got to know Allan a few years ago when I needed an advisor to help me “tune-up” my portfolio. I appreciated his candor, his analytical chops, his thoughts on asset allocation, his laser focus on fees and his willingness to challenge some of my assumptions. One of his best suggestions was that I create an investment policy statement which serves as a guide to my asset allocation during those turbulent market conditions that try mens’ (and womens’) souls. He wrote a provocative book that I recommend, How A Second Grader Beats Wall Street, which describes the simple strategies needed to be a successful investor (you will find out exactly who this wise second grader is during the podcast). Listen to this podcast and you’ll walk away with some ideas to make you a better investor. Enjoy!

Details:

Question: Who’s Saving For Retirement?

I had the Honorable John Ninfo on my podcast recently who described his “Scared Straight approach” to teaching young people about the perils of credit. He saw the consequences in the decades he served as a Bankruptcy Court judge in the state of New York. After looking at this infographic from the WSJ and the accompanying article, the overwhelming evidence is that we should be employing similar scare tactics to the topic of retirement planning because we better hope that the next generation is better prepared for taking on this responsibility: