In my earlier blog "Drip in new money" on 7Mar2008, I mentioned "internal rate of return" or IRR in short, and hence decided to delve into the feasibility of dripping in new money into a savings account versus an investment tool versus long-term inflation.
a) Money is dripping in at $100 per month into an investment portfolio (upfront sales charge capped at 2.5%) over 1 to 30 years;
b) Savings deposit interest is assumed at 1.0% per annum throughout;
c) Long-term inflation is assumed at 3.0% per annum throughout.
a) IRR for savings deposit at 1.0% per annum annualized returns is 0.51% at best over 30 years;
b) IRR for an investment portfolio at 8.0% per annum annualized returns is 4.56% per annum over 30 years;
c) IRR (an investment portfolio at 8.0% per annum) at end of second year of investing would have "overtaken" inflation at 3% by a slight 0.02%.
d) IRR for a 15%-per-annum portfolio over 10 years would have netted 7.76% per annum (more than double of inflation).
Nevertheless, a good portfolio does not happen by chance, and needs to be carefully crafted (selection and asset allocation) and fine-tuned via constant rebalancing.
Conclusion: In order to beat long-term inflation of 3% per annum without the risk of market timing, one needs to invest :-
i) a minimum of 15 years in a 6%-per-annum-returns-portfolio; or
ii) a minimum of 5 years in a 7%-per-annum-returns-portfolio; or
iii) a minimum of 2 years in a 8%-per-annum-returns-portfolio, and so on....
Hence, the money is made in the waiting or rather, "dripping"....