Spring and summer mark significant milestones for many younger people. There are graduations and weddings, events that mark important accomplishments and lifelong commitments. These occasions often call for a significant gift. While it’s easy to write a check, it’s impersonal and unimaginative. The worst part is that the only distinction between your gift and the next one is the dollar amount.
A thoughtful gift is one that keeps on growing year after year and introduces a sound and proven investing strategy. The strategy is dollar-cost averaging, and the gift is a five-stock portfolio held in dividend reinvestment plans (DRIPs) to make it easy and efficient to follow that strategy.
Your total cost to set up such a gift portfolio is somewhere is generally around $500, depending on the price of the stocks you select. In addition to the financial benefit, which has the potential to compound to substantial wealth over the long-term, this gift will provide recipients with a first-hand experience of a logical approach to building wealth by investing in stocks.
By “saving” in the stock of the companies in this DRIP portfolio, young investors have the opportunity to build wealth with cash investments of as little as $25 at a time. These small investments are likely to compound into real wealth based on the historical returns of the stock market over long periods of time.
Let’s assume that the graduate, the young couple (or you on their behalf), invest $1,500 a year for the next five years—that’s $125 a month spread evenly among the five high-quality, dividend-paying companies in the portfolio ($25 in each company every month). Let’s also say that no further investments are ever going to be made into those accounts. What would the total $7,500 (invested over five years) turn into? The answer may surprise you.
Assuming a 7% return compounded annually, you’ll have $8,801 at the end of your first five years. Leave that alone and make no more contributions and your investment would grow to $184,843 in 45 years assuming a conservative 7% annual average return compounded.
Now, let’s use a more realistic assumption: that is, that the average annualized growth rate is 11%, which approximates the long-term return achieved by the market as a whole as calculated by the Ibbotson organization. Assuming a 11% return compounded annually, you’ll have $9,552 at the end of your first five years. Leave that alone and make no more contributions and your investment would grow to $1,046,233 in 45 years. Now that’s a substantial gift!
Add another 1% return to your assumptions (because this five-company stock portfolio may well beat the results of the market as a whole) and your gift will provide a retirement portfolio worth $1,598,715. Now you can see the value of an extra percentage point over the long term. That 1% is what many people are needlessly paying in fees and commissions.