How Long Will It Take to Double My Money?
Before making any investment decision, one of the key elements you face is working out the real rate of return on your investment.
Compound interest is critical to investment growth. Whether your financial portfolio consists solely of a deposit account at your local bank or a series of highly leveraged investments, your rate of return is dramatically improved by the compounding factor.
With simple interest, interest is paid just on the principal. With compound interest, the return that you receive on your initial investment is automatically reinvested. In other words, you receive interest on the interest.
But just how quickly does your money grow? The easiest way to work that out is by using what's known as the “Rule of 72.”1 Quite simply, the “Rule of 72” enables you to determine how long it will take for the money you've invested on a compound interest basis to double. You divide 72 by the interest rate to get the answer.
For example, if you invest $10,000 at 10 percent compound interest, then the “Rule of 72” states that in 7.2 years you will have $20,000. You divide 72 by 10 percent to get the time it takes for your money to double. The “Rule of 72” is a rule of thumb that gives approximate results. It is most accurate for hypothetical rates between 5 and 20 percent.
While compound interest is a great ally to an investor, inflation is one of the greatest enemies. The “Rule of 72” can also highlight the damage that inflation can do to your money.
Let’s say you decide not to invest your $10,000 but hide it under your mattress instead. Assuming an inflation rate of 4.5 percent, in 16 years your $10,000 will have lost half of its value.
The real rate of return is the key to how quickly the value of your investment will grow. If you are receiving 10 percent interest on an investment but inflation is running at 4 percent, then your real rate of return is 6 percent. In such a scenario, it will take your money 12 years to double in value.
The “Rule of 72” is a quick and easy way to determine the value of compound interest over time. By taking the real rate of return into consideration (nominal interest less inflation), you can see how soon a particular investment will double the value of your money.
The Rule of 72 is a mathematical concept, and the hypothetical return illustrated is not representative of a specific investment. Also note that the principal and yield of securities will fluctuate with changes in market conditions so that the shares, when sold, may be worth more or less than their original cost.The Rule of 72 does not include adjustments for income or taxation. It assumes that interest is compounded annually. Actual results will vary.
This material was written and prepared by Emerald.
© 2010 Emerald Publications
Wednesday, September 29, 2010
Monday, September 13, 2010
Textbook September as Economy Passes Test
Dear Valued Clients and Blog Readers,
The first few days of September revealed much of what the economy did with its summer vacation. The economic data for the summer months through the end of August provided a report card that argues not for a return to recession, but instead for the return of slower—but stable—growth that often comes one year after the start of a recovery. The U.S. economy created 235,000 private jobs this summer (June through August), bringing the total to 763,000 jobs created through August of this year. As the time came to go back to school, it was also time for more people to go back to work.
Students of market history know that September is a tough month for investors. In more than half of the years since 1950, the month of September has resulted in losses for the S&P 500 Index. This has taken place despite gains, on average, in the first few trading days of the month when the key economic data was released. In fact, when the first three trading days of September resulted in gains for the stock market, those gains were followed by losses over the rest of the month 60% of the time.*
The stock market remains close to where it began the year. We continue to believe a late-year rally for stocks will fulfill our long-held outlook for modest single-digit gains on the year for the S&P 500. However, over the next month or two, the risk that this soft spot lingers and weighs on the markets is significant—especially given the historically weak market performance in September and October. Looking closer to the end of the year, the months of November and December have historically provided some of the best returns of the year*, on average, and this year’s seasonal bounce may be helped by clarity around the legislative environment with the outcome of the mid-term elections on November 2. This may lead to more of a political balance in Washington and slow the pace of legislative change due to the “gridlock” the market has historically favored. The market’s reaction to mid-term elections, as the uncertainty begins to fade, has almost always been positive, with fourth quarter gains averaging 8% in mid-term election years since 1950.
With it shaping up to be a textbook September, investors should brace for the price volatility that has defined this year to continue. We believe losses will be recouped by a late-year rally. However, in the meantime, we give high marks to yield-producing investments which offer investors a return while waiting out the price volatility in the stock market. As always, we encourage you to contact me if you have any questions.
Best regards,
Janet L. Barr, ChFC, CLU
IMPORTANT DISCLOSURES
This research material has been prepared by LPL Financial.
*Source: Bloomberg, LPL Financial
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Stock investing may involve risk including loss of principal.
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual. To determine which investments may be appropriate for you, consult me prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.
Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
LPL Financial, Member FINRA/SIPC
The first few days of September revealed much of what the economy did with its summer vacation. The economic data for the summer months through the end of August provided a report card that argues not for a return to recession, but instead for the return of slower—but stable—growth that often comes one year after the start of a recovery. The U.S. economy created 235,000 private jobs this summer (June through August), bringing the total to 763,000 jobs created through August of this year. As the time came to go back to school, it was also time for more people to go back to work.
Students of market history know that September is a tough month for investors. In more than half of the years since 1950, the month of September has resulted in losses for the S&P 500 Index. This has taken place despite gains, on average, in the first few trading days of the month when the key economic data was released. In fact, when the first three trading days of September resulted in gains for the stock market, those gains were followed by losses over the rest of the month 60% of the time.*
The stock market remains close to where it began the year. We continue to believe a late-year rally for stocks will fulfill our long-held outlook for modest single-digit gains on the year for the S&P 500. However, over the next month or two, the risk that this soft spot lingers and weighs on the markets is significant—especially given the historically weak market performance in September and October. Looking closer to the end of the year, the months of November and December have historically provided some of the best returns of the year*, on average, and this year’s seasonal bounce may be helped by clarity around the legislative environment with the outcome of the mid-term elections on November 2. This may lead to more of a political balance in Washington and slow the pace of legislative change due to the “gridlock” the market has historically favored. The market’s reaction to mid-term elections, as the uncertainty begins to fade, has almost always been positive, with fourth quarter gains averaging 8% in mid-term election years since 1950.
With it shaping up to be a textbook September, investors should brace for the price volatility that has defined this year to continue. We believe losses will be recouped by a late-year rally. However, in the meantime, we give high marks to yield-producing investments which offer investors a return while waiting out the price volatility in the stock market. As always, we encourage you to contact me if you have any questions.
Best regards,
Janet L. Barr, ChFC, CLU
IMPORTANT DISCLOSURES
This research material has been prepared by LPL Financial.
*Source: Bloomberg, LPL Financial
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Stock investing may involve risk including loss of principal.
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual. To determine which investments may be appropriate for you, consult me prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.
Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit
LPL Financial, Member FINRA/SIPC
Monday, September 6, 2010
2011 Tax changes at a glance!
Federal income tax brackets
Right now, there are six income tax brackets: 10%, 15%, 25%, 28%, 33%, and 35%. For 2010, these brackets apply to married couples filing joint federal income tax returns in the following manner.
2010 Income Tax Brackets--Married Filing Jointly
Taxable Income
Marginal Tax Rate
Not over $16,750
10%
Over $16,750 to $68,000
15%
Over $68,000 to $137,300
25%
Over $137,300 to $209,250
28%
Over $209,250 to $373,650
33%
Over $373,650
35%
As it stands now, there will be no 10% bracket for 2011, and the remaining bracket rates will return to their original 2001 levels: 15%, 28%, 31%, 36%, and 39.6%.
Long-term capital gains tax rates
For 2010, if you sell shares of stock that you've held for more than a year, any gain is a long-term capital gain, generally taxed at a maximum rate of 15%. If you're in the 10% or 15% marginal income tax bracket, however, you'll pay no federal tax on the long-term gain (a 0% tax rate applies). That means if you're a married couple filing a joint federal income tax return, and your taxable income is $68,000 or less, you pay no federal tax on the gain.
However, these rates expire at the end of 2010. Beginning in 2011, a 20% rate will generally apply to long-term capital gains. Individuals in the 15% tax bracket (remember, there won't be a 10% bracket in 2011) will pay the tax at a rate of 10%. Special rules (and slightly lower rates) will apply for qualifying property held for five years or more. Finally, while qualifying dividends are taxed in 2010 using the same capital gains tax rates described above (i.e., 15% and 0%), in 2011 they'll be taxed as ordinary income subject to the increased 2011 tax brackets.
The estate tax
There is currently no estate tax for 2010, and special rules are in place that govern the way basis is calculated for property passing upon death. The estate tax reappears in 2011, however, with a $1 million exclusion amount (meaning that up to $1 million of assets will be exempt from estate tax) and a top tax rate of 55%. To put that in context, for 2009, the top estate tax rate was 45%, and estates received an exclusion of $3.5 million.
Year
2009
2010
2011
Estate tax exclusion
$3.5 million
N/A
$1 million
Top estate tax rate
45%
No tax
55%
Other important changes
Other changes for 2011 include:
Phaseout of itemized deductions and exemption amounts--Itemized deductions and personal exemption amounts will once again be phased out for higher-income individuals
The "marriage penalty" returns--Changes made to correct the federal income tax "marriage penalty" expire at the end of 2010, resulting in a reduced standard deduction amount and lower tax bracket thresholds (i.e., higher rates will apply at lower income levels) for married couples filing jointly in 2011
Tax credits get cut--The child tax credit will be reduced and both the Hope education tax credit and the earned income tax credit become less generous (the Making Work Pay tax credit also disappears)
Section 179 small business expensing--The increased IRC Section 179 expense limit ends (Section 179 allows small businesses to elect to expense the cost of qualifying property rather than recover the cost through depreciation deductions); the amount that a small business may expense will drop from $250,000 in 2010 to $25,000 in 2011
Right now, there are six income tax brackets: 10%, 15%, 25%, 28%, 33%, and 35%. For 2010, these brackets apply to married couples filing joint federal income tax returns in the following manner.
2010 Income Tax Brackets--Married Filing Jointly
Taxable Income
Marginal Tax Rate
Not over $16,750
10%
Over $16,750 to $68,000
15%
Over $68,000 to $137,300
25%
Over $137,300 to $209,250
28%
Over $209,250 to $373,650
33%
Over $373,650
35%
As it stands now, there will be no 10% bracket for 2011, and the remaining bracket rates will return to their original 2001 levels: 15%, 28%, 31%, 36%, and 39.6%.
Long-term capital gains tax rates
For 2010, if you sell shares of stock that you've held for more than a year, any gain is a long-term capital gain, generally taxed at a maximum rate of 15%. If you're in the 10% or 15% marginal income tax bracket, however, you'll pay no federal tax on the long-term gain (a 0% tax rate applies). That means if you're a married couple filing a joint federal income tax return, and your taxable income is $68,000 or less, you pay no federal tax on the gain.
However, these rates expire at the end of 2010. Beginning in 2011, a 20% rate will generally apply to long-term capital gains. Individuals in the 15% tax bracket (remember, there won't be a 10% bracket in 2011) will pay the tax at a rate of 10%. Special rules (and slightly lower rates) will apply for qualifying property held for five years or more. Finally, while qualifying dividends are taxed in 2010 using the same capital gains tax rates described above (i.e., 15% and 0%), in 2011 they'll be taxed as ordinary income subject to the increased 2011 tax brackets.
The estate tax
There is currently no estate tax for 2010, and special rules are in place that govern the way basis is calculated for property passing upon death. The estate tax reappears in 2011, however, with a $1 million exclusion amount (meaning that up to $1 million of assets will be exempt from estate tax) and a top tax rate of 55%. To put that in context, for 2009, the top estate tax rate was 45%, and estates received an exclusion of $3.5 million.
Year
2009
2010
2011
Estate tax exclusion
$3.5 million
N/A
$1 million
Top estate tax rate
45%
No tax
55%
Other important changes
Other changes for 2011 include:
Phaseout of itemized deductions and exemption amounts--Itemized deductions and personal exemption amounts will once again be phased out for higher-income individuals
The "marriage penalty" returns--Changes made to correct the federal income tax "marriage penalty" expire at the end of 2010, resulting in a reduced standard deduction amount and lower tax bracket thresholds (i.e., higher rates will apply at lower income levels) for married couples filing jointly in 2011
Tax credits get cut--The child tax credit will be reduced and both the Hope education tax credit and the earned income tax credit become less generous (the Making Work Pay tax credit also disappears)
Section 179 small business expensing--The increased IRC Section 179 expense limit ends (Section 179 allows small businesses to elect to expense the cost of qualifying property rather than recover the cost through depreciation deductions); the amount that a small business may expense will drop from $250,000 in 2010 to $25,000 in 2011
Wednesday, September 1, 2010
The Domino Effect??
http://www.collaborativefinancialsolutions.com/files/LPL/Research/RES%202354%200610.pdf
Many investors and market pundits prescribe to the Domino Theory, which states that one bad event tips over another issue that eventually causes everything to fall just like dominos.
The thought is that the already fallen dominos, such as unemployment, home losses, Greece, and others, have created a wave that will spread through the global economy.
While the Domino Theory certainly makes sense in the realm of little black stones with white dots on them positioned in an orderly pattern, it is based on assumptions that frankly do not hold water in the complex world of global markets.
While there has been much focus on the negative effects of the crisis in Greece and other European nations, the markets have not factored in that positive events have also sprouted as a result of these issues.
Consumers have lower mortgage rates, lower gas prices, and employment has posted job growth to the tune of 1.1 million net new jobs (not including census workers) in six of the last seven months.
Global central banks in economic powerhouse countries like the U.S., China, and Brazil once again have a reprieve from inflation concerns.
Valuations are now set at attractive levels, and fundamentals of the market continue to trend towards the transition to sustainable growth.
But do not expect a straight up rally from here — volatility will likely remain very elevated.
Many investors and market pundits prescribe to the Domino Theory, which states that one bad event tips over another issue that eventually causes everything to fall just like dominos.
The thought is that the already fallen dominos, such as unemployment, home losses, Greece, and others, have created a wave that will spread through the global economy.
While the Domino Theory certainly makes sense in the realm of little black stones with white dots on them positioned in an orderly pattern, it is based on assumptions that frankly do not hold water in the complex world of global markets.
While there has been much focus on the negative effects of the crisis in Greece and other European nations, the markets have not factored in that positive events have also sprouted as a result of these issues.
Consumers have lower mortgage rates, lower gas prices, and employment has posted job growth to the tune of 1.1 million net new jobs (not including census workers) in six of the last seven months.
Global central banks in economic powerhouse countries like the U.S., China, and Brazil once again have a reprieve from inflation concerns.
Valuations are now set at attractive levels, and fundamentals of the market continue to trend towards the transition to sustainable growth.
But do not expect a straight up rally from here — volatility will likely remain very elevated.
Subscribe to:
Comments (Atom)
