Fribble

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Monday, March 15, 1999

Compounded Foolanthropy
(Part with your money Foolishly)

by (cfteague2@yahoo.com)

I'm relatively new to Fooldom, but I've already learned more about investing in the past three months than I would have believed! (Try this for a laugh: Think back to before you discovered The Motley Fool and imagine your reaction if someone told
you that you would be snubbing your nose at Wall Street, not because investing was risky, but because Wall Street wasn't very good at making money!)

Lately, I've spent my time reading Fribbles, Fribbles, and more Fribbles (the entire Fribble Archive, if you must know). In many ways, they are more approachable to the new investor rather than diving right into the portfolios section. But they still drive home the key messages of Fooldom.

In my reading, I came across many good points, two of which I'm penning this Fribble about: First, the importance of giving; and second, the magic footwork of the Compounding Clown. My Foolish thought: Why not combine them?

Let's assume that you're already out of debt and you've already started your retirement plan rolling for this year. Now, you've got some leftovers to invest. Also, now that your financial future is looking brighter, you're thinking about giving to your favorite charity.

The stage is set. If the amount you were planning on giving to charity wasn't too large a percentage of the money you were going to invest, let me suggest a plan for you. Invest the money, but plan to give a percentage of it each year.

I ran some numbers with the following assumptions:

a) initial charity goal roughly $250 - $300
b) investment funds available $5000
c) annual return 20% (the Foolish Four or something similar has the potential)
d) taxes/commissions not included in the calculation
e) no new money is added

With these numbers, it worked out that you would give about 5% of the total value at the end of each year. Here's some highlights:

year start  gain   gross  charity end value
1    5,000  1,000  6,000    300    5,700
5    8,443  1,688 10,131    507    9,624
10  16,250  3,250 19,500    975   18,525
20  60,227 12,045 72,272  3,614   68,658

(Note that my calculations were done without the benefit of a spreadsheet -- just plain old Windows Calculator. So there's a tiny bit of round off error. I rounded gains down the dollar, and rounded the amount given to charity up to the dollar.)

The 20 year total given to charity was $27,297 (compared to $6,000 if you just gave $300 per year). Plus you have almost 14 times the money you started with! The trick to making it work is that the percentage you give each year has to be low enough that your annual return is still fairly high. With a 20% return, and giving 6% (5% after 20% gains = 6%), you net a 14% gain per year. Fools will note that, even
after giving to charity, you still beat the market (and of course, most mutual funds).

They say that "Fools and their money are soon parted." Looking at these results, I can see why -- Fools can afford to be generous! And, TMF Selena, don't forget to remind people of this around Christmas time!


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