Although
this column is meant to deal solely
with financial matters, I trust you
will forgive my using this opportunity
to relate a marvelous back-to-school
experience in which I've had the privilege
of participating.
As
president of the Clifton Rotary Club,
I've enjoyed the pleasure of joining
fellow Clifton Rotarians in distributing
dictionaries to every third grade student
in the Clifton public schools. What
a joy! We visit the classrooms with
the school principal and met each teacher
and her 3rd graders. The kids couldn't
have been more enthusiastic and eager
to dive right into their books and look
up words. To be inquisitive, learn and
understand is key to being successful
in life. Witnessing these adorable third
graders starting on their road to success
gives one great faith in their future
and ours.
And,
speaking of our future, here's that
math review. Let's examine four hypothetical
$100,000 portfolios ranging from very
aggressive to moderately conservative…A,
B, C and D. In year one, they return
80%, 40%, 20% and 16% respectively.
The following year each portfolio, based
upon their underlying investments, doesn't
do so well, returning -40%. -20%, -10%
and -2%. Thus the average return after
two years, the sum of two years' return
divided by 2 would be 20%, 10%, 5% and
7%.
Quiz!!!
Which portfolio would return the greatest
wealth at the end of two years? A, B,
C or D? The answer is…..D, the
moderately conservative mix. Here's
why. Don't be fooled by average returns.
It's the "magic" of compounding
that counts. It's the interest that
is earned on the interest as well as
the initial principal.
Portfolio
A - $108,000 - 3.9% compound return
Portfolio B - $112,000 - 5.8% compound
return
Portfolio C - $108,000 - 3.9% compound
return
Portfolio D - $118,000 - 6.6%
compound return
Class
dismissed!
