Page 12 - DIY INVESTOR MAGAZINE - NOVEMBER 2018
P. 12

 A TALE OF TWO SISTERS AND SUCCESSFUL WEALTH CREATION
   When the Nobel Prize-winning scientist Albert Einstein was asked to identify the most powerful force in
the universe, he is said to have replied: “compound interest”. It’s no joke to say that the mathematical phenomenon of compounding - or the ability for gains to grow on gains and income to arise from income
- provides a powerful tool for anyone seeking to accumulate wealth. However, you will need time to make it work.
Whether you are saving up for a deposit to buy a home or to build a fund for retirement, the sooner you start the better. Like doing a little homework regularly over
a long period, instead of waiting to start until the night before exams, this will make it easier to achieve your objectives.
Better still, it’s easy to get started because many investment trust managers will accept regular investments from as little as £50 per month, which is less than many people spend on beer or coffee. Investment trusts are pooled funds that enable individual investors to diminish the risk inherent in stock market investment by diversification; that is, spreading their money over dozens of different shares and other assets. The principle is the same as not having too many eggs in one basket. These trusts also enable individual investors to share the cost of professional fund management or stock selection.
J.P. Morgan Asset Management is one of the biggest UK managers of investment trusts, giving investors a choice of over 20 trusts, focused on different types of companies and countries around the world.
We will look at some trusts whose priority is capital growth later but, first, let’s consider how compounding can help investors build wealth. Here’s a personal
finance parable, a tale of twin sisters Prudence and Extravaganza, to illustrate the value of saving sooner rather than later.
Prudence invests £100 a month from age 18 to 38 and then stops saving altogether. She achieves an average of 5% annual growth for the 20 years she invests and her fund continues to grow at 5% for the next 27 years until she retires at 65.
Extravaganza fritters away her money on frocks and handbags, saving nothing until she is 38. Then she starts saving £100 a month — until she, too, is 65. Extravaganza also achieves 5% a year during the 27 years she is investing.
At 18, both had nothing. When Prudence reaches 38 she has pension savings of £41,000. Extravaganza
has zilch. Now, here’s the point of the tale: at age 65 Prudence has £145,795. Extravaganza has just £68,219. So Prudence has more than twice as much at retirement as Extravaganza, even though Prudence invested a total of only £24,000, while Extravaganza invested £32,400. The explanation is that Prudence invested for 20 years before Extravaganza got going and those early pounds had another 27 years to fructify or grow in the wise sister’s fund.
Which raises the question of which fund to choose. While the past is not a guide to the future and you may get back less than you invest on the stock market, it
is worth considering what individual funds’ objectives are and how well they have performed in attempting to achieve them.
 DIY Investor Magazine | Dec 2018 12


















































































   10   11   12   13   14