Last time, I shared how our 4 plex did in 2013. It’s not generating positive cash flow, but it’s getting close. Unfortunately it’s not the right property for us and we decided to sell and take a little profit. We’ll probably profit about $50,000 and many comments said that it’s probably better to keep the rental. Fifty thousand dollars is nothing to sneeze at, but in the grand scheme of thing, it’s not that much money. That’s only about a year in expenses. The important thing is to reinvest that money and grow it over the next 20 years. That’s the key to growing your wealth. You need to keep investing and put off withdrawal as long as possible.
The stock market seems pretty high at the moment, but the one thing I learned is to keep adding to your investment through the ups and downs. I started investing in the stock market in 1996 and consistently added to my investment every month. You don’t have to be a genius to grow your wealth, but you do have to keep at it.
Let’s take a look at how the stock market did since 1996. We’ll use Vanguard’s S&P 500 index, VFINX.
The stock market had two big crashed since 1996 – the dot com bubble and the Great Recession. If you invested a $50,000 in January 2000 and don’t add to it at all, then you’ll gain about 25-30%. That’s around $15,000 in profit, but inflation would eat all that up.
However, if you reinvest the dividend, you’ll boost your return by a huge percentage. Just by putting the dividend back into the fund, your return will increase from 25% to 75%. That’s huge. Here is the chart from Moringstar that includes dividend reinvestment.
Can you imagine how much better your ROI would be if you add just a hundred dollars or two every month for 14 years? I tried to calculate how adding $100/month would impact the ROI, but it’s a bit difficult. I can get the price from Yahoo Finance, but that doesn’t include dividend. Adding $100 every month would boost ROI by about 65% over 14 years without reinvesting the dividend. I guess we can just add 65% to the chart from the 75% we got from Morningstar. We’ll get about 140% increases if you reinvest the dividend and add $100/month. That’s just an estimate but I think it is close. If you know a good stock market calculator that can handle initial investment and monthly investment, please let me know.
|Invested in Jan 2000||Return in May 2014|
|$50,000 and spend the dividend||$63,000|
|$50,000 and reinvest the dividend||$85,000|
|$50,000, reinvest dividend, and add $100/month||$120,000|
So you can see that it’s imperative to consistently add to your investment for your wealth to compound. Dividend needs to be reinvested and any extra money added will smooth out the ups and downs of the stock market. If you’re younger than 55, you should be happy when you see a stock market crash because it’s a great buying opportunity. When you get closer to 60, then you need to be more conservative and shift some money away to bonds and other fixed income investments.
Reinvestment is the key
We’ll reinvest our profit from the 4 plex in the stock market or perhaps another property. I’m still optimistic about rentals as a source of income. We just need to find the right property for us. The important thing is that we’re not blowing the money on a sports car or anything like that. We’ll invest it and reap the benefit in 20 years when we’re both fully retired.
What about you? Do you keep investing through the bear and bull markets? It can be tough to add money when stocks are on the way down.
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