Page 46 - Workbook3E

“You can do what you want to do, accomplish what you want to accomplish, attain any reasonable objective... if you want it, if you work to do it, over a sufficiently long period of time.”
—William E. Holler
Spread the Risk
Take hold of a long, slender plant stem and break it in two. You’ll notice it’s not hard to do. Now take hold of a dozen more stems, all bundled together, and attempt to break them the same way. You’ll find it to be much more difficult.
It’s a lot like your investment portfolio. If all your capital is in one investment stem, your entire investment program could be broken if it drops in
value. However, by bundling your investment dollars together with many investments, you have a much stronger investment program. And like the bundle of stems, it‘s much harder to break.
2 Reinvest Your Earnings.
Depending on your time horizon for a particular investment, you may not immediately need the income it produces. Then, you can reinvest the income to earn compound interest. This can usually be done automatically through your fund manager.
For example, most mutual funds allow you to reinvest dividends or capital gain distributions automatically. When you reinvest in this way, you compound your return on investment and earn interest on your interest.
The power of compound interest was discussed in Workbook 1 and Workbook 2 and explains how you can use the Rule of 72 to double an investment. Just to remind you...the time needed to double the value of an investment is calculated by dividing 72 by the annual interest rate. For example, with an annual interest rate of 8%, the investment doubles every nine years.
42 Workbook 3: Prepare for the Future