The magic of compound interest (and dividends)!

Sir John Templeton once said, “The best time to invest is when you have the money.”

Another dependable saying, “It is time in the market, not market timing” is a great philosophy to remember when building wealth. And of course, I would be remiss if I didn’t give credit to the magic of compound interest – a truth that I would apply to dividends as well.

Those pearls of wisdom have been around longer than I have been an investment professional. And yet, I still see investors chasing rabbits. The desire is often to get rich quick, be in the hot sector and regale their friends with hot tips around the water cooler. It’s just all too tempting and besides, who wants to be left out? Never mind that, more often than not, the decisions to buy or sell are just so fraught with emotion that many people end up losing their money.

And this is not a one-off.

Every generation has found a way to jump on a losing bandwagon. Depending on your age, your great boom and bust could be the commodity cycle of the ’80s, the tech cycle of the late ’90s, or oil and gas in the ’70s, ’80s and again in the mid-2000s. The list goes on.

What if you considered a different approach? Have a plan and invest regularly. Consider spreading risk across multiple sectors and investing in companies that share their profits with you every quarter. Better still: Companies that share their profits and are often dedicated to raising your dividend as frequently as possible.

Reinvest the proceeds evenly across the portfolio and rebalance when one sector becomes too large or too small. Imagine that you had taken this road less travelled and purchased shares in a major corporation that reflect this profile instead of chasing returns. You might be surprised to learn that $25,000 invested 30 years ago in one of our Canadian banks would net you a cool million dollars today (before tax). A return of more than 3,700 per cent. That is a great watercooler story!

I think it is very likely that those great investors of our time had it right and all we had to do was listen.

Asset allocation, diversification and compounding interest and dividends all in support of a solid financial plan – what could be easier? Thank you Sir John!

This article was supplied by Joanne Livingston, an investment advisor with RBC Dominion Securities Inc. Member-Canadian Investor Protection Fund.

Livingston MacDonald Wealth Management helps young professionals with $200,000 or more of investment assets articulate and execute smart financial plans. Visit LivingstonMacDonaldwealthmanagement.com.