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July, 2008

100% A YEAR (WELL, SORT OF) -
REVISITING THE 10-FOLD INVESTMENT PLAN
by LARRY

In honor of our 100th online issue, I thought I would touch on an idea referred to earlier, how one can in ten years multiply an initial nest egg tenfold, which works out to an arithmetic average increase of 100%* a year (for years 2 through 10 of that decade).

To put a ten-fold investment plan into effect, first look at your own budget carefully and pick any reasonable initial amount, be it $1000, $10,000, or $100,000, etc. It does not have to be some nice round figure that ends in lots of zeros. It could instead be $1555, 15,555, $155,555, or whatever. The trick is to set oneself a realistic final target, and for that it is essential to have a reasonable starting number, to be increased over the next decade.



So, let's suppose you chose $25,000 that you can either raise quickly or already have on hand at the beginning of year one. Here is all you need to know to increase that to $250,000 in ten years and thus increase the initial amount 10-fold (effectively by 100% a year after the first year) till arriving at a quarter million by the end of the investment decade:

  1. First, through savings and careful investing, raise that $25,000 in seed money. This is a lot easier (and probably should only be settled on as a starting amount) if one already has, in one's own earnings or between two salaries, yours and your spouse's, for instance, $25,000 available over necessary annual budget items.

  2. Each year, increase that amount by 26%, using the combination of new earnings income added plus investment returns on assets already put into the growing nest egg.

  3. At the end, one has $250,000 and so by the magic of compounding will, over the course of the last 9 years, have been increasing the initial year's starting figure at the rate of 100% annually. (Total increase [years 2 through 10]: $250,000 minus the initial year starting figure of $25,000 = $225,000. $225,000 divided by 9 years = $25,000 a year, 100% of the initial amount.)


Here is a demonstration of this approach using an average 15% a year investment return after taxes (and/or in tax-deferred accounts), the balance being provided by adding extra funds:

YearBeginning
Value		Increase
through 15%
Investment
return		(Belt
tightening)
11% New
Investment		26%
Total
Increase		Year End
Investment
Value
1$25,000$3750$2750$6500$31,500
2$31,500$4725$3465$8190$39,690
3$39,690$5954$4365$10,319$50,009
4$50,009$7501$5501$13,002$63,011
5$63,011$9452$6931$16,383$79,394
6$79,394$11,909$8733$20,642$100,036
7$100,036$15,005$11,004$26,009$126,045
8$126,045$18,907$13,865$32,772$158,817
9$158,817$23,823$17,469$41,292$200,109
10$200,109$30,016$22,012$52,028$252,137

Total New Investment:$96,095
+ Initial Amount:+$25,000
Grand Total Investment:$121,095
Average Annual Investment:$12,110

Thus, assuming a 15% average return (performance of the asset prices, plus dividends, less commissions or fees or any taxes), one would have a total of $121,095 invested but a final 10-year nest egg of over $250,000. What is more, after the first year, the outlay of investment funds would be more modest at first, befitting the lower early incomes of most individuals or couples. The first year total increase, for example, is just 26% x $25,000 or $6500. Some years the markets will be bearishly down, and then one will need to raise more of that year's increase from other income. But other years will likely be boom ones, when more (or even all) of the increase will be taken care of by the markets.



It seems best not to be too obsessively committed to this strategy. One would perhaps be ill-advised, if money became tighter than expected along the way, to make up the difference between one's target and actual investment return each year with ever larger margin debts.

And one should guard against being too optimistic about one's annual investment returns. An assumption of the illustration table is that one invests using value investing methods (techniques that limit purchases to assets meeting both strict value and safety criteria, and sales to assets that no longer have good price to value). Investors using less proven, reliable, or profitable investment approaches might figure on getting about 10% a year average returns, and on adding in the difference between those results and the yearly targets from budgetary savings or new earnings.

But if one uses common sense and keeps one's starting amount neither too large nor too small, and rather in a Goldilocks "just right" range, one may get a lot of reward from seeing that initial nest egg multiplying by 10 in just a decade.



There is great potential satisfaction from pursuing an investment program which, though modest at first, may lead to much more substantial results in time. Indeed, since it is not unusual for a younger individual or couple to find income resourses gradually increasing, as from promotions within or job changes to more responsible and lucrative positions, it may be possible, a year or two after beginning a small 10-fold investment plan, to add another small 10-fold plan to the first, etc.

In this way, it is feasible that in the first decade of marriage a couple might have started enough (individually small) investment programs that they will have, in a relatively few more years, relatively large nest eggs. Five such plans, begun with just $10,000 (twice the usual per person allowable annual IRA contribution) could each result in $100,000 of savings and investments after the first decade. When all five have matured, i.e. in 20 years or less, the couple might have a half-million dollar nest egg.

But this approach need not be just for the young. In a typical household, income is at its highest in the middle to older working years, a time when children often are leaving and becoming independent and one's residence may be nearly or completely purchased. So, in this period too one may find it realistic to begin and maintain one or more 10-fold investment programs as a way to see one's retirement nest egg progressively growing, till large enough to meet the needs of living comfortably and securely after regular employment ends.

I wish you all many happy investment returns.



(*Of course, I am engaging in a bit of distortion of the figures to come up with 100% a year, since to do so I am leaving out the first year. It is completely correct, though, that this strategy produces in ten years a final figure that magnifies the initial one ten-fold. Counting year one as well as years 2 through 10, though, the average actual arithmetic increase is still over 85% a year, a not insignificant gain.)


DISCLAIMER

Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)



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