| Index Mutual Fund Name | Amount Invested | Market Value |
| TDB900 | $200.00 | $400.00 |
| TDB902 | $100.00 | $98.00 |
| TDB909 | $100.00 | $150.00 |
| TDB911 | $100.00 | $50.00 |
| Time Elapsed: 6 Months | ||
| Total Invested: $500.00 | Total Value: $698.00 | Total Worth: + $198.00 |
So, in other news. I turned my first real profit today! <3 I know it will most likely disappear tomorrow, and watching these index funds this closely is sort of redundant.. But, because it's my first investment, I'm pretty excited about it. Payday is coming up, and I'm looking forward to investing my $152.00 so I can buy into index funds TDB902 and TDB909. Anyways, this is just more personal garble and I'll move on to some actuality.. (By the way, it was my first $100.00 investment, and I checked today and it's worth $101.00. Woo, a whole dollar!)
So, remember how I was telling you that I didn't -really- understand the whole concept of an index fund, and I just kind of blindly fell into submission and started? Well, that's all still true, but I've been reading a bit more about the definition of an Index fund. While I can't find anything that doesn't refer "Index Funds Follow and Index and blah.." which to me just sounds like a reiterating statement that explains actually nothing... But! I did stumble across an article that explained it quite well, or so I'd like to believe. Kerry, over at SquawkFox, did it quite well. If you're not willing to go there (which you should) to read the article, I'll sum it into my own wording;
"Index Mutual Funds are Mutual Funds that are not managed by a humanoid. These funds are managed by a computer, and follow a, usually, major economic stock market index (ever heard of the Toronto Stock Exchange?) If you're not following, remember those squiggly marks on that small Andex chart I posted? Those.."
She later goes on to explain a bit of the benefits associated with Index Funds, so that's a plus in my books. Better overall long-run returns, lower management fees, no stupid humans involved in wrecking things up.. Anyways.
I hope that helps make a little bit more sense. On to today's topics;
-Dollar Cost Averaging.
-Compound Interest Rates.
Dollar Cost Averaging.
This may sound like some super complicated strategy in the professional world of lucrative stock trading and whatnot. It is not. This is a simple concept in which a lot of 'professional' persons are mislead around. Pride and Greed are powerful things, but they can often get in the way of each other when they're side-by-side. Let me explain..
The concept of buying stocks is; Buy High, Sell Low. This means you have to watch the markets, and pay a lot of attention as to when to do these two things. This is what a professional is going to do with your money. Unfortunately, nobody can really tell how the stock market is going to react, so.. People will buy a low priced stock, thinking it will rise, only to see its price plummet more. To cut the losses, they'll sell at a lower price. They've now bought low, and sold lower. Many are afraid to commit to buying high because of fear entertained by the concept of stocks reaching a plateau and not rising much more. This stereotype perpetuates itself within the stock market, and the only real loser is you, who are paying these people to literally play with your money. You'd probably be better to take it to the Casino. At least there, you'll get free drinks and food if you have enough money to blow...
Anyways, getting carried away...
Dollar Cost Marketing means you, and I cannot cannot cannot stress this enough, routinely purchase your portfolio's Index Funds. This means that when the prices are normal, you get a normal price. When the prices are high, you get a little less than average. When prices are low, you get a little more than average. Not only does this rule incite discipline within ourselves, but it also means that we're usually getting a better deal. We're investing in these index funds for the long haul, so we'll be investing as the cost rises, anyways. While it seems a little scary when the markets take a dip, we're actually just getting a much better deal on buying our funds. We're getting cheaper units while the markets in a downturn, and when it rises again (stop it, the only time the market won't recover is if the U.S. petro dollar is obliterated...) we're actually looking much better because we now have a boatload of shares we got for a steal. Dollar Cost Averaging. Don't forget this term. Just, always routinely purchase your index funds. This is what it means, now, go put it in to action!
Compound Interest Rates.
Okay, so I'll say this again, I'm trying to keep complex mathematics out of this blog. So, you'll just have to trust my math while I show it to you.
Let's learn a little about the term "Interest" first. Interest is the term used to tell you what to expect your dividends to be. I mean, your interest means just how much money you're looking to earn for having your money in the bank, investment, etc. If you have a yearly interest rate of 2%, it means that for every dollar you have in the bank, you'll earn 2 cents for every year it sits there. So, you technically earn 2 cents for doing nothing. That's all this means. Interest is how much money your money is going to make you. Got it? Good.
Compound Interest means when that interest is earned, it's not taken out of the account. It's put back in the account to accumulate more interest on itself. This is how your money really potently starts to duplicate itself. Let's look at a 10 year period for a flat $100.00 in the bank at a 5% interest rate.
| Year | Principle | 5% Interest Rate | Interest Earned | Total | ||||||||||||
| 1 | $100.00 | 5% | $5.00 | $105.00 | ||||||||||||
| 2 | $105.00 | 5% | $5.25 | $110.25 | ||||||||||||
| 3 | $110.25 | 5% | $5.51 | $115.76 | ||||||||||||
| 4 | $115.76 | 5% | $5.79 | $121.55 | ||||||||||||
| 5 | $121.55 | 5% | $6.08 | $127.63 | ||||||||||||
| 6 | $127.63 | 5% | $6.38 | $134.01 | ||||||||||||
| 7 | $134.01 | 5% | $6.70 | $140.71 | ||||||||||||
| 8 | $140.71 | 5% | $7.04 | $147.75 | ||||||||||||
| 9 | $147.75 | 5% | $7.39 | $155.13 | ||||||||||||
| 10 | $155.13 | 5% | $7.76 | |||||||||||||
| Amount Reinvested: | $45.00 | |||||||||||||||
| Actual Interest Earned: | $10.13 | |||||||||||||||
So, what this all really means is that instead of every year, pulling the $5.00 out of the bank that you'd have normally made, you just let that money sit in the bank. In year 2, you earned 5% on $105.00 instead of $100.00. Because it was such a low number (Only one hundred bucks) and for such a short period (10 years is nothing.) you only earned an extra $10.00. But that money is only there because of the compounded interest. You'd never have seen that if you didn't keep your five dollars in the bank.
This is how compound interest works, and why it's important. You can see that it's definitely an upward spiral the longer this continues. At first, you made... If you weren't paying attention and are too lazy to do the math: You earned; $0.25 / $0.26 / $0.28 / $0.29 / $0.30 / $0.32 / $0.34 / $0.35 / $0.36. I suppose it looks pretty unimpressive with such small numbers, but in time the power to explode is within!
I'm sure in a few years I'll be looking at other avenues of investing my money. I'm still leery to the concept of the stock market, and I haven't learned a lot about ETF's just yet (Although I think they're very similar to Index Mutual Funds, except in the way that they're priced and what they cost to manage..) I've read things about "Dividend Yielding Stocks, DRIP plans, etc." This is something I will continue to read about, and it's something I'll definitely keep in the loop on the blog.
Good luck saving your money! I'm going to look into what hidden costs there are in the Index Mutual Funds in my portfolio, if there are any, and try and do some reading about Exchange Trade Funds.
No comments:
Post a Comment