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3 Things 12-28

A Letter From Grandma

We happened across a letter in a financial advice column a few years ago that’s worth sharing. It was from a grandmother looking to share a little of what she had with her grandkids. The letter, which was pretty simple, was addressed to the column's author, who had Ph.D., CFA, CFP, CASL after his name. Here it is:

"Dear Dr. Don, I have four grandchildren whose ages are between 2 and 4. We spend $150 on them for birthdays and Christmas. Wouldn't it be wise to purchase a certificate of deposit for them so that, when they turn 16 or 18, they will have some money for a car or college?

Thank you, -- Grandma Gaye"

The reply to Grandma was long and complicated. We’ll just summarize it by saying he suggested she buy the savings bonds. The only open question was whether they should be Series EE or Series I.

Rather than take issue with what the financial advice columnist had to say, we’ll just say there are other options. In fact, a blogger with fewer letters behind his name shared some generic advice that we think might be an appropriate alternative for Grandma. See it below:

"...A smart buyer who purchases a blue-chip stock today which is priced at $100 and pays a $3 annualized cash dividend will likely see the share price grow to ~$1,600 and the cash dividend yield $50 after 40 years, assuming that its average annual earnings grow at 7% compounded annually. "

Applying the same 7% growth rate above to Grandma's $300 per grandkid per year contribution would yield almost $50,000 (roughly $12,500 for each of the four grandkids) over the 20 years - and that's without counting the dividends and their inevitable growth.

Keep this example in mind should a similar situation present itself to you or someone you know


Gold vs Stocks - A history Lesson

There's a saying, past is not prologue. Of course, it's true. But here's a history lesson, nonetheless, on the price of gold versus the Dow Jones Industrial Average (DJIA):

On January 21, 1980, the price of an ounce of gold was $850 while the DIJA was valued around the same time at 876.11. Today (40 years later), the price of gold is $1905 (up 2.2 times from 1980) while the DIJA is 30,199 (up 34 times).

Think about that for a second. If you had been 27 in 1980 and had managed to squirrel away $10,000 which you then decided to invest in gold for the day you turned 67, your $10,000 would be $22,000 today. If you had instead invested in the DIJA, your $10,000 would be $340,000.

What's the point? Well, there are a couple. The first is that the admonishment, past is not prologue, bears repeating. There is no guarantee that the next 40 years will look like the last, in other words, That said, over the long term, stocks have outperformed every other asset class. So, while it's not an ironclad bet, it's at least one based on historically sound data/logic. As for your own portfolio, the amount you should invest in stocks depends on a few factors;

1) Your temperament (tolerance of volatility) first and foremost

2) How much you have relative to how much you want to have

3) How much time you have to accumulate what you want to end up with

It really is that simple so don't let anybody try to convince you otherwise.

Thing Three

Just A Thought

"Compound interest is the eighth wonder of the world. He who understands it earns it; he who doesn't pays it.” - Albert Einstein

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