by Archie M. Richards, Jr., CFP^®
June 2, 2003

Louise writes, "In your column about Don Delay and Go Gettum (see www.ArchieRichards.com for the column dated April 28, 2003), you don't provide the formula for the compound growth. Could you please give me a formula that computes how much my money will grow in the future. I'm always amazed at how much it does grow!"

I made up the examples in the column, Louise, assuming contributions of $3,000 a year to an IRA, with everything growing at 10 percent. I chose 10 percent because it's a nice round number and because I expect the stock investments of the world to achieve this kind of return over the next decade or two - maybe even a little better.

But there's no assurance that you or anyone else can actually attain this. In the last three years, many investors would have felt fortunate if they gained anything, never mind 10 percent a year.

I presume you're invested in stocks. I happen to think that new technologies and improving government policies will bring handsome gains for U.S. and foreign stocks over the next decade or two. But nevertheless, it isn't healthy to estimate specifically how much your money will grow.

When you set up expectations about your future performance, you may be exhilarated or disappointed. In either case, the emotions could lead you to unwise actions; they could knock you off your course.

It's okay to remain hopeful, of course. But if you make your expectations too specific, you increase your emotional reactions. This does more harm than good. Better for your investment returns to keep your emotions down to a dull roar. Make the best investments you can, but don't try to calculate specifically what they will return.

The best approach is to invest in index funds or exchange-traded funds, choosing many types of investments: big and small stocks, growth and value stocks, stocks of foreign nations, real estate investment trusts, and bonds. When one type is falling, others might rise, reducing the risk.

Think of the stock market as the ocean. Experienced seamen know that they're not in control. Those do not respect the majesty of the ocean are eventually swallowed by it.

As to stock investments, the market is in control. This is no reason to be out of stocks. On the contrary, in the long run they're the best investments of all. But once you're in, let the market have its way. Give up the feeling that you're in control of it, because you're not. Give up the expectation that the market will produce a certain return, because it won't. Accept what the market gives you. In the short run - even for a period of several years - the market may give you heartache. But over a period of many years, it will give you much to be thankful for.

You say that you're amazed at how your investments grow. They do indeed. It's because the people of the world are creating wealth for themselves, and for you.

The market doesn't grow every year, of course. But most of the time it does. On average, each year's earnings add on to the previous year's ending balance, generating a new, higher balance which then grows all the more. After 20 years - and especially after 30 years - the effect of compounding is stupendous.

Take Go Gettum from my 4/28/03 column, for example. He contributes $3,000 a year for eight years. He then stops contributing, but the investments keep growing at 10 percent. Thirty-three years later, he has $876,481. Over a long period, this kind of growth is entirely possible.

Lee writes that he wants to interest his four minor grandchildren in saving and investing. He'd like to start each of them with $1,000 in a mutual fund. What fund would I suggest?

Nice idea, Lee. I suggest using Vanguard's Total Stock Market Index Fund (800-552-7447). The fund tracks the entire U.S. stock market. In a regular account, Vanguard's minimum is $3,000. But in a Coverdell Education IRA or custodianship, the minimum is only $1,000.