This post is an update to a previous post I created on March 11, 2019. In the beginning of March 2019, I decided to conduct a small investing experiment. I took Warren Buffett's investing advice, and purchased an index fund: the Fidelity 500 Index fund, FXAIX. At that time, the mutual fund was trading at a net asset value (NAV) of $95.70. So with $290, I bought 3.03 shares ($290/95.70). The following day, I successfully asked my student loan servicer to allow me the opportunity to skip the next month's payment by claiming "financial hardship." I used that skipped payment, $1,800 to be exact, to buy 18.81 additional shares of the fund (1,800/95.70). I then had a total of 21.84 shares (3.03 + 18.81) or $2,090 invested. Here's where I stand 3 months later.
Before we delve into the calculations, you need to understand how investors make money in the stock market: capital gains and dividends. In simple terms, a capital gain is the increase in value or price of an investment to a price higher than the initial purchase price. On the other hand, dividends are a portion of earnings or profits that a company pays to shareholders of a stock or mutual fund. As of 6/21/19, mutual fund FXAIX is trading at a NAV of $102.95. This new NAV represents a $7.25 increase in capital gain ($102.95 - $95.70). On 4/8/19, the fund paid out a dividend rate of 0.574/per share to fund holders. These calculations are summarized in the table below.
|Fund Ticker||Fund Name
||Capital Gains Rate
||Capital Gains Amount||Dividend Rate||Dividend Payment||Balance|
|FXAIX||Fidelity® 500 Index Fund||$0 (as of 3/15/19)||$0 (as of 3/15/19)||0 (as of 3/15/19)||$0 (as of 3/15/19)||$2,090 (as of 3/15/19|
|FXAIX||Fidelity® 500 Index Fund||$7.25 (as of 6/21/19)||$158.34 (as of 6/21/19)||0.574 (as of 4/5/19)||$12.54 (as of 6/21/19)||$2,260.88 (as of 6/21/19)|
As shown in the table above, the amounts earned in capital gains and dividends are $158.34 (21.84 shares x $7.25) and $12.54 (21.84 shares x 0.574), respectively. The combined amount earned in dividends and capital gains is $170.88 ($12.54 + $158.34). As of 6/21/19, the total balance is $2,260.88. This new balance represents a percent increase of 8.18% from the initial investment [(170.88/2090)*100). Keep in mind that I made no additional contributions. Otherwise, the gains would have been more. Here are the main takeaways from this simple experiment.
This simple 3-month investing experiment illustrates these few key facts:
- Investing is not solely reserved to the wealthy. You don't need a lot of money to start investing.
- Investing is the best way to save for retirement and secure a brighter financial future.
- If you were wondering how investors make money in the stock market, they do so via earned capital gains and dividends.
- Any money stockpiled in banks (or your mattress!) beyond your emergency fund is a waste. Banks invest the money you deposit with them to generate higher returns. They can afford to give you crumbs.
- If governments want to help their citizens get ahead financially, they must help them create self-sustaining opportunities.
- When you invest, your money makes more money even when you sleep. The rich understands this concept very well.
- If you have a 401k at work, you are an investor. Congratulations! If you don't have an employer-sponsored 401k account, open an IRA (Roth or traditional) or an investment account.
- If your company offers a 401k program and you don't participate, you are robbing yourself of a brighter financial or retirement future.
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