Christmas 2007

IRA gift letter

By Kaye A. Thomas
Posted December 25, 2007

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First in a series.

As explained here, I've composed letters to accompany gifts that come in the form of contributions to Roth IRAs for our daughters, who are young adults. Here's the second one, for Christmas 2007. By the way, the fourth big investment principle (the one that's omitted from this letter) is diversification. I'm saving that for next year. By that time I expect we'll have at least one quarterly report where the account lost money (so far it's gained money every quarter) and I'll want to point out how much more it might have lost without good diversification.

 

Again With the Boring Christmas Present

Not again?

Yes, again! More money for your Roth account.

Why not something fun?

This is fun! Feel the excitement? Seriously though, there’s a point to this. Actually several.

Such as?

There are only four really big principles involved in building up serious money in an investment account, and here’s one of them: add to the account on a regular basis. In making another gift to your account, I’m following that principle.

And?

I’m not only following that important principle, I’m teaching it, or trying to, anyway. So you can follow it whenever you’re ready. In my warped view of things, that’s the most important gift here: the knowledge, not the money.

And?

This is an excuse for me to review what’s happened to your account. The mutual fund sends us a report every quarter (in other words, every three months), and so far it has gone up in value every time. That won't always happen. For now, though, you should be pleased to learn that the account has grown by $X in addition to the $X we contributed.

See how this works? It’s like that line on 30 Rock: “I’m going to do that thing rich people do where they make their money turn into more money.” And here’s something else exciting: you’re well on your way to being a thousandaire.

Ha ha. Are we done?

Obviously not. Remember I mentioned there are four big principles?

I was afraid you’d come back to that.

We covered two of them last year. One is that it’s important to put most of your long-term investment money in stocks. In the short run you have some risk of losing money in stocks but over the long run stocks grow more than other investments. Remember that? No, I didn’t think so, and that’s why I’m reminding you.

And the second one was . . .

It’s really really important to keep your investment expenses to a minimum. Remember that stuff about how long it takes for an investment to double? Higher expenses mean a slower growth rate so the account takes longer to double. In the course of your lifetime, you might see your investments double five times if you keep your investment expenses low, but only four times if you don’t pay attention. It may sound like a small detail, but doubling your money one more time means you end up with twice as much money.

So now we’ve covered two of the four big principles.

No, three! If you were paying attention earlier you’d remember the one about adding money to your account on a regular basis.

And the fourth one?

Not now. You must meditate on the first three. The fourth will be revealed when you’ve achieved a higher state of enlightenment. Like maybe next Christmas.

Are we done?

Yes. Once again I’m putting in $X for Christmas and $10 to cover the annual maintenance fee.

Thanks.

You still can’t thank me by reading something I wrote.

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