Active Return

Finance a la shmoop... what is automatic reinvestment? alright you bought an index

fund the focus companies whose names begin with the letter G, it's the G

indexer or G-index so like you know it's a whole lot of groupings of Google a

gaggle of GE, a glob of Gap, General Mills General Motors, Goldman Sachs you know [Lots of company logos]

through the Garmin the GPS people that's your index fund all G's while your

strategy and index picking may leave room for improvement while one element

you want to take advantage of is the provision for automatic reinvestment

that is for no incremental commission or fee instead of receiving your dividend

as cash and spending it on silly things like rent and gas and food you reinvest [Person receiving dividend]

your dividends and simply buy more shares of the G for good index fund the

effect over time is that your fund compounds at a much higher rate than it

would have had you just taken those cash distributions and run well how much

faster does it compound well if it was to grow at 6% a year without the

dividends reinvested and the dividends were about 3% a year then your total

return would have been 9% using you know advanced calculus there and remember

that rule of 72 thing well it takes an investment compounding at 6% that's 72 [Rule of 72 appears]

divided by 6 which means that the investment there will take about 12

years to double but in this case with dividends reinvested and we're gonna

ignore taxes here it's growing at 9% a year so it takes only 72 divided by 9

.....8 years to double with the

automatic reinvestment feature kicking in and 8 is better than 12 when it comes

to doubling your money in years that is and over time this is a really big deal [Man discussing automatic reinvestment]

like if you started with 10 grand in savings and just left it invested for 25

years well here's what it looked like note that you end up with almost double

your money when you automatically reinvest the money rather than take it

out as cash and also note you know our thing on taxes here if you have your

investment in a taxable account as opposed to an IRA or a 401 K which is taxdeferred [Taxable account and IRA/401k piles of cash appear]

that's how everything kind of plays out so the fund throws off lots of dividends

which you reinvest not only will you not be taking the cash from those dividends

but you'll have to pony up cash from some other source to pay the tax as you

go if you hold your index fund you know in a taxable account anyway if you don't

need the cash and have the discipline to just reinvest and well forget about it [Woman holding pile of cash]

you'll be a whole lot richer in the end game and that'll happen right about the

time you're too old to really enjoy it unfortunately youth is wasted on the [Kids sat on the grass talking]

young, you'll be too senile to regret it though so that's that's upside right...