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Snowballs and Dividends

Snowballs and Dividends

April 04, 2024


Have you ever wondered how do you actually grow your investment account?  Is it just luck of the draw or the quality of your investment advisor’s crystal ball? And what does it have to do with snowballs?

 

My favorite analogy is the snowball.  You’ve made an initial investment in your account by purchasing something- perhaps a stock or a mutual fund that generates dividends.  Dividends are cash “incentives” that individual companies might pay out during the year to encourage investors to buy and hold their stock.  Dividends can be paid out on a monthly, quarterly, semi- annual or annual basis.

 

Imagine that your initial investment is a snowball and the clock (your investment timeline – how long you anticipate staying invested) starts ticking. Give your snowball a little shove so it starts to roll down a path in the snow. Your stock/mutual fund (your snow ball) starts earning dividends. Those dividends are reinvested back into your account (your snow ball) and now you have more shares (a bigger snowball). Because you have more shares you will receive more dividends in the future and your snowball gets bigger. 

 

Ultimately you will have more shares (a really big snowball) than you started with and, possibly, those shares appreciated, and your account has grown

 

In the meantime, there are a couple things that you should keep in mind:

  1. Keep your focus on the end-game (retirement or whatever your goal is for this account). Don’t get caught up in the current geo-political machinations or fears peddled by the 24- hour cable news  business.  You are in this for the long-run.

 

  1.  Don’t let the emotional part of your brain take over when the market gets spicy. The worst thing an investor can do is make emotional (fight or flight) decisions.  Be rational and deliberate.

 

  1.  Market volatility is normal. If you have expectations that it isn’t, you are in for a few surprises.

 

  1.  Your financial advisor is your person should you need help, information, or accountability. Utilize her.