Video: Investing in Dog Years Part 2

Watch on YouTube: Investing in Dog Years Part 2

Matthew following up on the power of compounding (Investing in Dog Years). He shows you how to get your own target rate of return by filling out an investor profile questionnaire from Charles Schwab. That way, you can figure out your personal investing dog years.

Here’s a link to the Schwab investor profile questionnaire that we used.

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Video Transcript:

Hi! Welcome Back. This is Matthew from A in Finance.

Last week we talked about using doubling cycles like your personal investing dog years.  But we just used a “made-up” interest rate for our examples. So in this video, we’ll show you how to get your “real” personal rate of return target so you can figure out your own investing dog years.

So how do you figure out your rate of return target? Well, your rate of return estimate is based on your investment strategy. But how do you know what your investment strategy is? Fortunately, it’s really easy and it’s all stuff that you can find online. Most brokerage firms have a personal questionnaire that you can fill out to find an investment strategy that fits your personality.

I just googled “investor profile questionnaire.” There are several options, but I like the Schwab questionnaire.

The Schwab questionnaire is based on two scales: 1) your Time Horizon and 2) your Risk Tolerance.  Your time horizon is how far out in the future you are investing before you need the money. The longer you have before you need your money, the more time you have to weather the ups and downs of the market. Your risk tolerance is how worried you will be when the market dips. If you worry a lot, then you may want a strategy where the dips are not quite as big. Anyways, let’s fill out the questionnaire and see what it recommends.

The first one is I plan to begin withdrawing money from my investments in less than 3 years, 3-5  years, 6-10 years, or 11 or more years.  I would pick eleven years or more because I’m investing for my future.

The second question is once I begin withdrawing funds from my investment and I plan to spend all of the funds in… I would choose eleven years or more because I’m thinking this is for my retirement plans so I need to spread out my money so that I don’t use all of it.

So I picked eleven years or more which is 10 points and 11 years or more which is 8 points. So 10 + 8 is 18.

Now the risk tolerance I would describe my knowledge of investments as limited because I’m not as good as my dad.

I am most concerned about my investment losing value, equally concerned about my investment losing or gaining value most, concerned about my investment gaining value. I would choose most concerned about investment gaining value because if I’m only concerned about losing in then why would I even invest.

Select the investment you currently own or have owned in the past with the highest number of points I have stocks and / or stock funds.

Consider the scenario imagine that in the past three months the overall stock market lost 25% percent of its value and individual stock investment you own also lost 25 percent of it. I would buy more shares because when my investments go down there probably going to go up. So if it’s going I would probably buy more shares.

Review the chart below we outline the most likely best and worst-case annual returns of the possible investment plans. Which range of possible outcomes is most acceptable to you? I would choose highly aggressive because I will have more doubling cycles.

So risk tolerance is 2+8 = 10. And 10 + 6 = 16. 16 + 8 is uh… edit this out… 24. And 24 + 10 = 34. So I have 18 and 34 and I’m in the aggressive group.

The strategies range from Conservative to Aggressive. My dad says that the Conservative strategy is more for people who may need the money sooner and don’t like the ups and downs. Like older people going into retirement. At that stage, they will be spending their money soon so it’s more important to protect themselves from losing money rather than go for the upside. So, the Conservative strategy invests more in fixed income, which is another name for things like bonds and CDs. It has the lowest average return of 7.8%. With that return, your money would double every 9.2 years.

On the other end of the spectrum is the Aggressive strategy, which is for people who have a long time to invest and are seeking growth. The Aggressive strategy invests mostly in equity. Equity is just another name for stocks. It has the highest return of 10.3%, which means that your money doubles every 7 years. So it’s for people like me. I have over 50 years so I just want my stocks to grow as much as possible.

And for every investment strategy, there are also best year and worst year numbers. These are the peaks and valleys. The Conservative has the smallest best year of +22.8% and the smallest worst year of only -4.6%. The Aggressive has the biggest best year of +39.9% and the biggest worst year of -36%. What this means is that the Conservative is a little safer because it does not move up or down as much as the Aggressive in any given year.

Let’s look at this in a chart. Here’s one of US stocks over the past 25 years. There were two big drops around 2000 and 2008 during the mortgage crisis. If you invested at the first peak and had to sell at the bottom of the second drop, then you would have lost one-third of your money. So stocks are risky over short periods of time. But if you held on for the 25 years, you would now have 5 times your money, which shows that over a long enough time, stocks tend to grow in value. So if you plan to spend your money sooner, then it’s safer to go more conservative.

Now let’s take a look at a chart of stocks and bonds over the past 90 years. You see if you invested $1 in 1926 in bonds, it would be worth $93. But if you invested $1 in large company stocks, it would be worth $2,982. And if you invested $1 in riskier small company stocks, it would be worth $16,055. What this tells you is that stocks win over time. If you have enough time, then stocks are probably your best strategy.

Back to our dog years. For me, I’m using the Aggressive strategy with my money in stocks because I have lots of time to weather any dips. Again, to figure out my doubling cycle I use the Rule of 72. So, 72 divided by 10.3 is about 7. So my doubling cycle is 7 years.

I have 56 years before I turn 65, so 56 divided by 7 is 8 doubling cycles. Remember 8 cycles is 2 x 2 x 2 x 2… 8 times, which equals 256. So if I invested $10,000 today instead of buying something my dad says like a Rolex, I would have over $2.5 million dollars by the time I retire instead of just an old watch.

It’s pretty cool that even a relatively small amount of money invested can turn into huge money if you start early enough. So figure out your own personal doubling cycle and use it as a quick rule of thumb to figure out the tomorrow dollars you could have if you start today.

Anyways, thanks for watching. Hoped you enjoyed it and learned something. Please subscribe to our A in Finance YouTube channel and like us on Facebook. And look out for another video next week. Thanks. Bye-bye.

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