The Avalanche Effect

In the Grey Nomads last post we introduced Australian broad based ETFs which gave individual investors and SMSFs a way to invest in the market and own a diversified portfolio in the process. The returns don’t give off a get rich quick scheme, but I want to demonstrate a long term commitment can deliver a significant pot of gold.

So how do we get to the end of the rainbow? Well I want to revisit the last article where we discussed Vanguard’s ETF (Unfortunately, we could not get stock quote ASX:VAS this time.)which tracked the ASX300 .This one has seen returns of 9.12% averaged annually over the past 9 years.

Now for your part. Let’s assume you start with a principal figure of just $1000. Invest that in an ETF like ASX:VAS, put $100 a week away and on payment of dividends reinvest those dividends plus the $100 a week you have been saving. This strategy is a long term picture remember, so let’s look at what we would have in 10 years’ time. Your $1000 just became $81,851.

Now that you are a bit older, more advanced in your career, getting paid more and going out less let’s try and double our contribution to $200 a week. The principal is now $81,851. Don’ go buy a ski boat, rather let’s look to grow the funds to maybe one day get that yacht. With $200 contributions over the next ten year period that originally $1000 has now become $354,829. That’s a lot of money.

Now at this point you have put in $1000, plus $52,000 in the first ten years and another $104,000 in the following 10 years. So that’s about $198,000 you’ve earned in interest. But you’re not done yet. You’re clever, successful (well you were smart enough to start saving) so entering the next stage of your career is exciting, more money to spend. But you’re not about all the reckless spending, you’re a saver and that is why you will love this next part.

Time to up the ante, we double the contributions again. $400 a week. With the principal now $354,829 its time to really start earning that interest. At the end of this 10 year period, and a total of 30 years of saving you end up with $1,167,132. That’s made up of $364,000 of your contributions, your $1000 principal and over $800,000 interest. That’s the avalanche effect I mentioned in the last post. The fund can end up earning you more money that you put in.

Now it is important to note that I haven’t included brokerage fees. Assuming you buy shares on a quarterly basis with the release of dividends, this will approximate to $1800 if you are charged $15 a transaction, or $2,400 if you are charged $20. The below table aims to highlight what the possible returns are for a few different scenarios (assuming the $100, $200 and $400 contribution model).

Principal $1000 $1000 $1000 $1000 $1000
Average Annual Return (%) 7% 8% 9.12% 10% 11%
Total Contributions $364,000 $364,000 $364,000 $364,000 $364,000
Total Interest $491,676 $622,757 $802,132 $971,395 $1,201,566
Final Value of Investment $855,676 $987,757 $1,167,132 $1,336,395 $1,565,566

For those interested, if you did the same with your bank savings account with the questionable interest rate of 3% you’d end up with 508,769, earning only $143,769 in interest. So while you might consider the market to be daunting, too scared to invest, remember that it can make a lifetime of difference.

And it is that final point that we will be looking to address here at the Grey Nomad. How to invest, some of the basic pointers, explaining the acronyms and understanding how to buy, and how to sell. As always, if you have any questions, once again feel free to reach out!