When it comes to investing, are you more prone to suffer Lemony Snicket's Series of Unfortunate Events than you are to have the Midas Touch?

Today, in honor of the DVD release of the Lemony Snicket movie, Political Calculations^(TM) offers a fun tool, in which you may safely see what the future value of your investment might be if you were to experience the financial misfortune that surely come at the hands of your investment advisor, Count Olaf, or the incredible wealth you would obtain if your investment advisor was none other than King Midas.

The calculator below allows you to enter a fixed amount that you would invest each year for the number of years you specify. You will be invested in the entire U.S. stock market, which may be fairly represented by today's Wilshire 5000 index. For each year a deposit is made in your investment account, the amount of money you place in the hands of either King Midas or Count Olaf will, for the length of time that the money is invested, have either the corresponding best or worst case inflation-adjusted rate of return as outlined by Political Calculations' post Best and Worst Case Stock Market Investing.

For example, the money that would be deposited for a period of one year will have two future values calculated, one based upon the best historical rate of return for a one year period and the other based upon the worst historical rate of return for a one year period. This process would be repeated for the money placed with these "advisors" for two years, five years, twenty years and so on, until the entire term of your investment period is covered (up to fifty years.) The respective future values for each investment term are added together and provided in the calculator's results below:

Using the calculator, we can find some surprising results, particularly in the Lemony Snicket scenario (of course, we expected good results from King Midas!)

Even with the worst historical inflation-adjusted rates of return, after 29 years of investing, an investor will at least break even (an effective rate of return of 0.0% for that investing period.) In 38 years, the investor would have an effective rate of return of at least 2.0% for their investment, outperforming such "safe" investments as government bonds. After 46 years, the investment account would be worth more than twice what had initially been invested, with an effective rate of return over the entire period of roughly 2.9%. In fifty years, the maximum for the calculator, your effective rate of return on your entire investment in the Lemony Snicket scenario would be slightly over 3.4%. And also notice that at no point in this exercise did the investment lose its entire value.

More than anything else, the Lemony Snicket scenario shows the power of investment diversification and compounding interest over time when it comes to investing. Even with Count Olaf's horrible timing encompassing the worst stock market performances in history, provided the investment is suitably diversified and combined with the compound nature of long term investment growth, even Count Olaf could come out ahead!

Labels: best case, investing, tool, worst case

- posted by Ironman at 11:25 AM | Permalink | |