ShmoopTube

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Finance a la shmoop... what is automatic reinvestment? alright you bought an index

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fund the focus companies whose names begin with the letter G, it's the G

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indexer or G-index so like you know it's a whole lot of groupings of Google a

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gaggle of GE, a glob of Gap, General Mills General Motors, Goldman Sachs you know [Lots of company logos]

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through the Garmin the GPS people that's your index fund all G's while your

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strategy and index picking may leave room for improvement while one element

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you want to take advantage of is the provision for automatic reinvestment

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that is for no incremental commission or fee instead of receiving your dividend

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as cash and spending it on silly things like rent and gas and food you reinvest [Person receiving dividend]

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your dividends and simply buy more shares of the G for good index fund the

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effect over time is that your fund compounds at a much higher rate than it

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would have had you just taken those cash distributions and run well how much

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faster does it compound well if it was to grow at 6% a year without the

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dividends reinvested and the dividends were about 3% a year then your total

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return would have been 9% using you know advanced calculus there and remember

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that rule of 72 thing well it takes an investment compounding at 6% that's 72 [Rule of 72 appears]

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divided by 6 which means that the investment there will take about 12

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years to double but in this case with dividends reinvested and we're gonna

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ignore taxes here it's growing at 9% a year so it takes only 72 divided by 9

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.....8 years to double with the

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automatic reinvestment feature kicking in and 8 is better than 12 when it comes

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to doubling your money in years that is and over time this is a really big deal [Man discussing automatic reinvestment]

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like if you started with 10 grand in savings and just left it invested for 25

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years well here's what it looked like note that you end up with almost double

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your money when you automatically reinvest the money rather than take it

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out as cash and also note you know our thing on taxes here if you have your

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investment in a taxable account as opposed to an IRA or a 401 K which is taxdeferred [Taxable account and IRA/401k piles of cash appear]

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that's how everything kind of plays out so the fund throws off lots of dividends

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which you reinvest not only will you not be taking the cash from those dividends

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but you'll have to pony up cash from some other source to pay the tax as you

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go if you hold your index fund you know in a taxable account anyway if you don't

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need the cash and have the discipline to just reinvest and well forget about it [Woman holding pile of cash]

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you'll be a whole lot richer in the end game and that'll happen right about the

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time you're too old to really enjoy it unfortunately youth is wasted on the [Kids sat on the grass talking]

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young, you'll be too senile to regret it though so that's that's upside right...

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