3 Things 12-9-24
Thing One
If It Sounds Too Good To Be True, It Probably Is
I took an inquiry recently from someone who had been approached about a can’t-miss investment opportunity. The essence of the opportunity was this:
You put in $300,000 and agree to keep it locked up for 20 years and you receive $49,000 per year and get your $300,000 back at the end of the twenty years.
That sounds too good to be true. The quick math on the first year’s “return”, which would be repeated every year, says the investment is guaranteed 16.7% yearly. I don’t know of such an investment (with a guaranteed return that is) for one year, much less twenty. Over the course of 20 years, if the account isn’t touched, other than to deposit the $49,000 annually, the balance will have grown to $1,280,000. The return numbers from this perspective look much tamer. On an annualized basis, that’s roughly 7.5%, which isn’t bad but not record-shattering either when you consider that the S&P 500 has returned closer to 10% annualized over the last 100 years.
It turns out in this case that an investment that looks too good to be true in the short term might not be good enough in the long term.
As always, buyer beware.
Thing Two
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.
Thing Three
Just A Thought
“It is not the strongest of the species that survives, not the most intelligent that survives. It is the one that is the most adaptable to change.” - Charles Darwin
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