Would not be awesome to double your return of investment while decreasing drawdown and the volatility of the portfolio? I bet everybody would like doing that. So let me share a lesson I learned a bit late in life. Never too late to learn and if applied at younger age, well… later in life you might find yourself with some good money in your brokerage account.
Imagine you have $5,000 and you want to make this money grow in the market. Depending on your risk tolerance you might choose to allocate a part of this money to equities and the remaining part to bonds. How much can you make? Let’s look at the CAGR of the first table below. In the upper row, the first number represents the percentage of medium term treasury bonds (ETF = IEF) while the second, the percentage of equities (S&P500, ETF = SPY). 100% equities would give you an annualized return of 9.12% (good) with a max drawdown of 52% (bad). 100% bonds would give an annualized return of 2.17% (bad) with a max drawdown of 11% (OK-ish). If looking for stability, we might want to allocate 60% to equities and 40% to bonds. How much my $5,000 would be worth in 15 years? $11,755. Sooo much waiting to add a mere $6,755 in 15 years.
Do not you want to do better? Actually, there is a way to do it while still investing in the same instruments with exactly the same investment methodology. The trick is: add a little bit of money each month to your investments. In technical terms this is called Dollar Cost Averaging. Many of you might be familiar with this practice, despite, first: let’s quantify its potential, second: let’s see how to do this even better.
Going back to the previous example. Let’s start investing $5,000, 60% in equities and 40% in bonds. This time, we add $250 per month to the brokerage account. Our annualized growth now increases from 5.86% to 117.79% with a maximum drawdown of 12%; see table below. After 15 years, the original $5,000 would have grown into $106,229.Better than $11,755, right? Yes! Of course this is not only thanks to the market. By adding $250 per month, you have actually contributed $45,000 ($250*12*15). The difference this time is: by combining the effect of the market and your ability to save money each month, you manage to create an actual growth of $56,229 (106,229-45,000-5,000). Definitely much better than the previous $6,755!
Can we do better than this? I bet we can! The way I do it is by investing in an actively managed strategy. NEXT-alpha is the flagship strategy of Alpha Growth Capital. The strategy returned an annualized 24.74% in its more than three years of life. By investing $5,000 in NEXT-alpha, without dollar cost averaging, after 15 years, the AUM would be worth $137,696. If we now add $250 per month, at the end of the 15 years, the account would be worth $1,123,211. Much better is not it?
Concluding: definitely getting rich over night with the stock market might be tough but… today we have learned that if we leverage the compounding potential of the market, combined with the ability to save and invest some money each month, by having enough patience, we can grow a small amount of money into something much bigger.
I do it, why can not you? 😊
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