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Tuesday, October 16, 2007

Investing for Income and the Power of Compounding

Compounding

The following is an excerpt from Richard Russell?s web site called the Dow theory letters. This is so well written that I could not explain the power of compounding in simpler terms then the way Mr. Russell has.

Richard writes;

"One of the most important lessons for living in the modern world is that to survive you've got to have money. But to live (survive) happily, you must have love, health (mental and physical), freedom, intellectual stimulation -- and money."

He goes on to say;

"Compounding is the royal road to riches. Compounding is the safe road, the sure road, and fortunately, anybody can do it. To compound successfully you need the following: perseverance in order to keep you firmly on the savings path. You need intelligence in order to understand what you are doing and why. And you need knowledge of the mathematics tables in order to comprehend the amazing rewards that will come to you if you faithfully follow the compounding road. And, of course, you need time, time to allow the power of compounding to work for you. Remember, compounding only works through time."

And finally

"But there are two catches in the compounding process. The first is obvious -- compounding may involve sacrifice (you can't spend it and still save it). Second, compounding is boring -- b-o-r-i-n-g. Or I should say it's boring until (after seven or eight years) the money starts to pour in. Then, believe me, compounding becomes very interesting. In fact, it becomes downright fascinating."

This excerpt is the key to riches and wealth using Canadian income trusts. These trusts pay dividends every month, month after month. If you reinvest these dividends then voila.....compounding!

Its so simple that you will wonder why you never though of this before! Income trusts pay you every month. If you re-invest the dividends of a trust then the magical effect of compounding will kick in. After a few years you will notice that your passive income level is begining to reach significant levels.

Conventional stocks say buy me now and maybe in the future I will give you back more money then you started. Well income trusts give you the cash every month so even if your stock price is the same 10 years from now you still have a decent total return.

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