| Do you believe in dragons? | | | | inflation and taxes. Before we talk about those |
| No, I didn't think so. | | | | two, let us compare the result if you had picked |
| While I do not believe in dragons as actual, living | | | | an investment that generated 8% a year. |
| beings - I do believe that they exist as three | | | | Scenario 2 @ 8% |
| harmful things that can steal your financial wealth. | | | | Starting amount - $1,000 |
| Just like the King Arthur tales of old, these | | | | Years - 18 |
| dragons will steal your wealth. Yet evolution has | | | | Additional contributions - $0 per month |
| taught these dragons to be more subtle and | | | | Rate of return - 8.00% compounded daily |
| sneaky and take from you without you even | | | | Total amount you will have contributed - $1,000 |
| knowing it. | | | | Total at end of investment - $4,220 |
| Like a Knight of the Round Table you need to | | | | Not surprising you would earn more money, but |
| challenge these beasts to protect your financial | | | | who would have known that the 3 point |
| kingdom. The purpose of this article is to tell you | | | | difference was worth $1,761 more! Taking the |
| about these dragons and how you can fight them. | | | | greater risk does pay off. |
| Meeting the Dragons | | | | Avoiding Investment Risk is Risky To Your |
| 1) The first is known as "The Dragon of Taxes", | | | | Financial Health |
| 2) The second dragon is known as "The Dragon | | | | Risk is not a bad thing. You should learn how to |
| of Inflation", and | | | | manage risk, not avoid it. |
| 3) The third and most important dragon is known | | | | Taxes and Inflation are facts of life and will |
| as "The Dragon of Poor Performance" | | | | always erode your wealth. Since you cannot avoid |
| Why is the third dragon the most important? | | | | them, you need to learn how to manage them |
| Well, the first two dragons you cannot defeat. | | | | just like you need to manage risk. That only way |
| The Dragon of Taxes and the Dragon of Inflation | | | | you can do this by choosing investments that |
| are immortal! | | | | generate a higher return. |
| You see, the Dragon of Taxes represents the | | | | Want proof? |
| government's ability to levy taxes on your | | | | Using the two scenarios again lets assume that |
| earnings and wealth. Governments are always | | | | the government taxes you at 25%, for every |
| hungry for more revenue and will happily find | | | | dollar you earn; you give 25 cents to the Dragon |
| ways to spend your money. You may elect | | | | of Taxes. |
| somebody who will reduce your taxes, but you | | | | Scenario 1: A 5% return x 25% tax rate = 1.25 |
| will always pay some kind of taxes. You cannot | | | | points off your 5% return = 3.75% actual return |
| slay the Dragon of Taxes. | | | | after taxes. That is just barely keeping above |
| The Dragon of Inflation represents the demand | | | | inflation which has typically run between 2% and |
| of the marketplace for money and the interest | | | | 4% a year. |
| policy of governments. Inflation may be high in | | | | Scenario 2: A 8% return x 25% tax rate = 2.00 |
| some years and low in others, but it will always | | | | points off your 8% return = 6% actual return |
| erode your spending power and your wealth. You | | | | after taxes. Now this is a much better spread |
| cannot slay the Dragon of Inflation. | | | | over inflation. |
| The third dragon known as The Dragon of Poor | | | | Do you see what I mean when I say that the |
| Performance is the only dragon that you can | | | | Dragons of Taxes and Inflation will gobble you up |
| tame. The good news is that if you manage to | | | | when you invest poorly? The solution comes in |
| tame this dragon, it will help you fight the effects | | | | taming the only dragon that can help us fight the |
| of the other two dragons! | | | | other two. |
| Fighting the Dragons | | | | Taming the Dragon of Poor Performance |
| Let's pretend that you are a brave knight and | | | | One of the simplest ways of taming this dragon is |
| you set out to defeat the Dragon of Poor | | | | to stop investing in guaranteed investments (CDs |
| Performance. You attack but barely escape with | | | | in the US and GICs in Canada). Use them as a |
| your life because you misjudged the dragon's | | | | place to store money for short term periods |
| ability. You decide that it's best of lay low and lick | | | | while you are figuring out where to invest your |
| your wounds. | | | | money, but never use it has your main investing |
| Doing this seems like a wise move except that | | | | strategy. |
| while you are resting the other two dragons | | | | Get the best interest rate you can for your short |
| come along and gobble you up! | | | | term money. It is always better to get 3% than |
| You see, when you get poor performance in your | | | | 2% for the reasons mentioned above, but since it |
| investments either by picking too conservatively | | | | is a place to just park your money, you need to |
| or not picking right, the returns you do get are | | | | get your money working harder for you. |
| eaten up by taxes and inflation. Ouch! | | | | To find better investments, you want to directly |
| If you invest your money into something that is | | | | invest into companies on the stock exchange. |
| guaranteed to generate 5% a year, you have | | | | Unlike interest based investments like bonds and |
| just ensured that you are not making the money | | | | CDs/GICs, the stock market provides a much |
| you could have. There are investments out there | | | | higher rate of return. |
| that have consistently earned 8% a year and | | | | You may think that investing in the stock market |
| though they may be riskier, they should not be | | | | is like gambling. And it is gambling for those who |
| avoided. | | | | do not understand the rules. But just like a knight |
| Should you take increased risk for just a 3 point | | | | needs to use a sword and shield properly to fight |
| difference in the return? Yes! A 3 point difference | | | | a dragon, you need to learn how to invest to get |
| does not seem like much, but when you factor in | | | | your best returns. |
| the magical effect of compounding returns, it is | | | | Consider at the minimum Exchange Traded Funds |
| critical to get the better return. | | | | which are wonderful instruments that capture all |
| Let us assume you wanted to invest $1,000 for | | | | of the returns found in the stock market. They |
| your brand new child for him/her to have as a | | | | do better than Mutual Funds and should be the |
| graduating gift when they turn 18. You invest it, | | | | shield in every knight's armor. |
| forget about it, and never contribute another | | | | But easily, the Excalibur sword of the investing |
| penny. You choose an investment that gives you | | | | world can be found in stocks and options |
| a return of 5%. | | | | investing. If you want to not just tame but slay |
| Scenario 1 @ 5% | | | | the Dragon of Poor Performance, you want to |
| Starting amount - $1,000 | | | | start doing some research through websites, |
| Years - 18 | | | | electronic courses, and books on "Stocks and |
| Additional contributions - $0 per month | | | | Options". |
| Rate of return - 5.00% compounded daily | | | | Remember that the greatest rewards come to |
| Total amount you will have contributed - $1,000 | | | | those willing to manage the greatest risks! |
| Total at end of investment - $2,459 | | | | Good luck in your quest to tame the dragons! |
| Not too shabby, but we still have not figured in | | | | |