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 INSIDE
FINANCE
School's Open- Here's a Short Math Lesson
By Robert M. Jaffe, MBA, AAMS
September 9, 2005
Although this column is meant to deal
solely with financial matters, I trust you will forgive my using
this opportunity to express my personal feelings about tragic aftermath
of the situation in our Gulf Coast States. It is not my purpose
to examine social issues concerning our fellow-citizens that go
beyond the wrath of Mother Nature, but rather to question why the
level of preparedness or rather, lack of it, was so frightfully
lacking.
According to a Clifton city official, for whom
I have the greatest respect, our fair city is far better prepared
to deal with an event of similar magnitude. The first line of responsibility
is that of a city's administration, after which, the state and federal
governments are obliged to give support when called upon by the
municipality. Surely there are many questions to be answered by
the powers in Washington, Baton Rouge, Jackson and Montgomery; but
what were their counterparts in New Orleans, Biloxi and Mobile thinking
when Katrina began her attack on Florida fully four days earlier?
We have a fine city, not perfect to be sure, but
my comfort level is far greater knowing that we have a city that,
like the Boy Scouts' motto, is prepared.
Now, for the short math lesson. 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!
Please Email bob@cfsias.com
with your questions.
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INSIDE FINANCE
will appear regularly, addressing financial matters of interest
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Registered Representative,
Securities offered through Cambridge Investment Research, Inc.,
a Broker/Dealer, Member NASD/SIPC. Cambridge and CFS are not affiliated.
The preceding article
is for informational purposes only and should not be used as the
primary basis for an investment decision. Indices mentioned are
unmanaged and cannot be invested into directly. Past performance
does not guarantee future results. All examples given are hypothetical
and do not reflect actual investments. The views expressed in this
article are those of the author and are not necessarily those of
Cambridge. Bob Jaffe is Managing Director of CFS Investment Advisory
Services, LLC in Totowa and has been a Clifton resident since 1984.
Active in community affairs, Bob is Past Board Chairman of the North
Jersey Regional Chamber of Commerce and a member of its foundation
board. He serves as a commissioner on the Clifton Rent Leveling
Board and the Committee for Individuals with Disabilities. He is
Vice President of the Clifton Rotary Club. Representatives of Cambridge
do not offer tax or legal advice. Consult a professional for your
personal situation.
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