| The effects of compounding returns over time can | | | | that annualizedinflation over this period will be 3%. Of |
| be extremely powerful. The period oftime over which | | | | course the future may well turn out to be |
| a typical person builds the bulk of their financial | | | | quitedifferent. We could run some sophisticated |
| assets is 20 - 40 years:from when they start | | | | simulations to find out what would happenunder |
| working and investing to when they start to deplete | | | | various possible scenarios based on historical data. But |
| their portfolio inretirement. | | | | this is just for fun, so Iam going to stick with my |
| Have you ever wondered how large family fortunes | | | | simple assumptions for the purpose of illustration. The |
| are built - the kind of 'old' moneythat is passed from | | | | spirit ofthe results is what matters here! We'll also |
| one generation to the next? Or how elite universities | | | | ignore the effects of taxes and transactioncosts, |
| and otherinstitutions like the Church have built their | | | | both of which could actually be effectively minimized |
| massive endowments? | | | | in various ways. |
| The answer can be summed up in one word - time! | | | | Lastly we will assume that you are 30 years old |
| If you can invest money over | | | | today and have just given birth to yourfirst child. |
| multigenerationalperiods of time the results can be | | | | Congratulations! We'll also assume that your next 2 |
| truly staggering. | | | | generations will alsohave their first kids at 30. So your |
| Let's take a look at a fun example. | | | | $10,000 is going to be locked up for 85 years. |
| Imagine that you invest $10,000 today in a | | | | On your great-grandchild's 25th birthday he or she will |
| well-diversified stock portfolio and that youleave | | | | inherit the whopping sum of $6.9million! Hang on a |
| instructions in your will that this money is for the sole | | | | second, I hear you say. A dollar in 85 years' time is |
| use of your greatgrandchildrenwhen they reach the | | | | going to buy alot less than a dollar buys today. That |
| age of 25. It is unlikely that you will live to see | | | | is absolutely correct. So let's adjust for theeffects of |
| thatday, but if you did you would be in for quite a | | | | inflation - which we simplistically assumed to be 3% |
| surprise. | | | | per year. It still turns outthat your lucky descendent |
| First let's throw in a few assumptions. First, we'll | | | | will inherit a portfolio worth over $562,000 in today's |
| assume that this investment earns anannualized 8% | | | | dollars. |
| over the life of the investment. And we'll also assume | | | | Not bad at all! |