Creating and Maintaining Wealth

Creating wealth takes time. Wealth is created by owning assets that have the potential to appreciate faster than the rate of inflation and taxation. Numerous asset classes can create wealth, but equities are one of the more convenient asset classes to utilize. Unlike precious metals, art or real estate,

there is constant liquidity, no legal fees, or you don’t have to find an auction to sell your piece of art.

Equities provide the best long-term returns

$100 invested in 1972 in the S&P 500 became $6,036 at year-end 2015. The same $100 invested in the U.S. Government Bond Index turned into $2,293. And what $100 bought in 1972 cost $577 today due to inflation. There are some intriguing points about this 43-year time frame. Forty-three years is the length of the average person’s wealth creation phase of their lives. The average person joins the work force after college at age 22 and plans on retiring at 65, or 43 years later. After retirement, investors normally switch from wealth creation mode to wealth preservation mode and generating income from their investments.

Compounding matters

Total return investing, dividends/dividend growth, and reinvesting dividends are excellent ways to create wealth. The chart on the right shows the importance dividend growth can have on an investor’s total return. $100 invested in the S&P 500 Dividend Aristocrats with dividend reinvestment became $1,932 from 1990 through 2015. The same amount invested in the S&P 500 without dividend reinvestment only grew to $1,020 over the same period. Compounding growing dividends significantly enhances an investor’s total return over time.

Tilt the balance

As investors, it’s important to put the odds in our favor. Investing for total return does just that, especially over a long period of time. A Wellington Management study shows dividend payers and dividend growers have a long history of outperforming the market. The worst performing group from 1972 through 2015 was the dividend cutters and non-dividend-paying stocks were next.

Slow and steady wins the race

For wealth creation, longer-term investors might want to consider the slow and steady approach with a portion of their investment portfolio. Investing for total return with dividend reinvestment has a longterm proven track record of providing very attractive returns. Like with the tortoise and the hare, it’s not how you start the race, it’s how you finish.

– Tyler Graham

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