By Katherine Santiago
Trick question: which will earn you more money… an 8% annual return or a 10% annual return?
The real answer will surprise you.
Let’s start off by comparing two different 20-year investment strategies. In 1999, Investor A placed $100,000 into the S&P 500, which historically boast average annual returns of nearly 10%. Investor B invested the same amount into an investment, yielding a fixed rate of 8%.
Can you guess which investor has more money in present day 2018? If you said Investor A, guess again.
The chart below shows a net value of $306,529.70 for Investor A’s 20-year investment.
Investor A did well; but let’s see how Investor B made out..
Investor B ended with $454,921.98. Confused?
Well.. we’ll explain. The key difference between the two investments is that Investor B had a FIXED return. Because Investor B was earning a fixed return, he knew he would earn an 8% annual return like clockwork, which he compounded (explained in further details soon). Investor A, on the other hand, based his investment decision on the S&P 500’s AVERAGE annual return of 10%, which can be quite misleading.
Watch Out For Average Returns
To understand the hidden pitfall of average returns, look at this example of another $100,000 stock market investment into a Stock:
On paper, this investment has an AVERAGE return of 20%, but you can see the investor actually LOST $10,000; considering he started with $100,000 and ended with $90,000.
If you don’t believe the market is prone to drastic ups and downs like the example above, remember that we witnessed a 22%+ drop THREE TIMES in the past 20 years, resulting largely from unpredictable factors like fear and perception.
Unfortunately, the market is driven upon those factors (fear and perception) more than it is based on the actual fundamentals of the company or the economy. They are the two major drivers of the volatility of stock prices. When the market is dropping, so are stocks. They’re not necessarily dropping because of a company’s decrease in value; it’s the perception of what’s going on in the economy and what’s going on in the market that influences the market. A company underperforming in the expectations that they set out in one quarter can also decrease their value. Even something as simple as a news article being published about something an executive did (that has nothing to do with the company) can decrease the value of the stocks.
Can Playing It “SAFE” Really Be More Profitable?
According to Don Wenner, CEO of DLP Capital Partners, the simple answer is yes.
“The most important aspect of investing money and building wealth over time is not losing money,” says Wenner. “At DLP Capital Partners, our basic investment rules are: 1) Do not lose money- EVER. 2) Generate consistent returns. 3) Refer back to rule #1.”
Multiplying The Effects
Wenner adds that compounding fixed returns is a great way to accelerate a “safe” fixed return investment. Compound returns has often been referred to as “the most powerful force in the universe.” Larry Hickernell, Investor Success Manager, describes compounding interest as an incredibly powerful tool used to multiply an investor’s return over time. By reinvesting the distributions they receive (their interest) back into their investment rather than taking their distribution as income in the form of a check or direct deposit into their account, the investor’s balance can grow substantially over time.
The key to compounding is to save your profits and reinvest.
Adding your interest back into your investment does two things:
1) Increases the amount of your initial investment
2) Over time, you begin to earn interest on your interest, which can double your investment and then some in a shorter time frame
By using the “rule of 72,” you can easily calculate how quickly you can double your investment with a fixed rate of return. Simply divide 72 by the fixed interest rate. For example, dividing 72 by a fixed return percentage of 8 would be 9 years.
Learn More About Fixed Return Opportunities
DLP Capital Partners, known as “The Home of the Fixed Return,” offers fixed rates from 6.5-10%, with the option of compounding interest, as well as amazingly consistent variable rate funds with returns ranging from 11-17%+. With DLP Capital Partners, your investment can be confident to snag a GUARANTEED WIN.
Download our FREE Investor Success Guide today to learn more!