Thursday, March 25, 1999

Your Average Joe


April 1, 1999 brings around an anniversary of sorts for me. It was April 1, 1983 when I started investing. With the advent of the newly created Individual Retirement Arrangement (IRA), I went to my bank and plunked down my first $2000 into a certificate of deposit. Over the next sixteen years I've dutifully socked away my hard-earned cash into the stocks of good solid companies. Some years I could put away very little; other years I was able to contribute the full $2000. On average, though, I've saved just over $1400 per year. So now, as another April 1st approaches, I began to wonder what the actual return on my investment was.

You see, this April 1st is more than just another anniversary, it is also "hump day." Sixteen years down, 16 years to go until I can start withdrawing from that IRA and start living off the fruits of all that compounding. Of course, I knew what my year-to-year returns were and I could figure out my compounded annual growth rate. However, these numbers always included the $1400 per year that I was contributing. I rationalized this by thinking of them as dividends I was paying to myself. After all, I felt I was worth it. In the back of my mind, though, I knew that this was wrong and didn't reflect the return I was realizing from my investments alone. I was curious, would my actual returns be much less than I thought, a la the
Beardstown Ladies?

I dug through the Fool archives to find the Daily Dow article which explained how to figure out internal rate of return and then I dredged up my old tax returns and IRA statements (yes, I keep everything). So, armed with the numbers and the formula to crunch them, I was able to come up with the data I was looking for.

And the answer is... 22.8%. Not too shabby for 16 years; just your average, everyday, run-of-the-mill, market-beating return. Now, let's see, 22.8% for the next sixteen years multiplied by current value... Whoa! If I'm reading all those zeros right, it looks like something close to six million! I think I've got a new lucky number -- 22.8%. It has nice ring to it.

Be consistent; slow and steady wins the race; invest for the long term -- you can choose from a number of cliches. Just make the commitment to pay yourself first, stick with quality companies and you can be "average," too.

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