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Online share trading account
Australian Foundation Investment Company

THE investing secret for 2014 (actually for any year!)

Chris Morcom
Partner/Private Client Adviser
7 Jan 2014

Is your 2014 resolution to get wealthy?

Here’s the tip: compounding returns. I know, it’s boring and you have heard it all before. But the thing is, it actually works.

So, how can put this into practice this year?

A simple strategy is to open up an online share trading account, and direct $50 per week to the account. Every ten weeks, buy $500 worth of a quality listed investment company such as Australian Foundation Investment Company Ltd (ASX Code: AFI)www.afi.com.au, Argo Investments Ltd (ASX Code: ARG) www.argoinvestments.com.au,or Milton Corporation (ASX Code: MLT) www.milton.com.au . Have a good look at their websites to understand the investment you are making.

When the paperwork arrives from the share registry, ensure you select the option for dividends to be reinvested…remember, we are wanting to compound returns.

Let’s say you manage to find $500 to start your investing off now, and then buy a further five parcels of shares for $500 over the course of the year. This means you would have saved $3,000 and invested it for the future. Finding the cash can be as easy as taking your lunch to work each day – five lunches at $10 per day gives you the $50 a week you are wanting to save.

But what do you end up with at the end of the year?

Based on the share price of AFI being $6.28, dividends of 8 cents per share in February and 14 cents per share in August, and share price growth of 5% per annum, you would end up with around 470 shares at the end of the year worth around $3,093. Of the shares, 463 were purchased with your savings, and 7 came from the reinvestment of dividends.
But of course share market investing is for the longer term, and not for a year. And the power of compounding seems pretty weak over shorter periods. If you were to use the same assumptions as before, and factor in dividends rising by 3% per annum, you could accumulate a lot of money over the next 20 years… and imagine if you increased the amount you saved!

Saving $450 a week under these assumptions would give you around $1.1 million in 20 years’ time.

The secret is time, reinvesting your earnings, and methodically investing.

Keep in mind the above strategy is for general information purposes and you should seek advice from an appropriately qualified professional to ensure the strategy is appropriate for your circumstances.

Projections over long periods of time are subject to many variables, and should dividend rates or share price growth not be as estimated then the results could be substantially different.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.