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Retirement Videos 84 videos

Finance: What is a redemption charge?
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A redemption charge is a charge applied when you redeem shares of a mutual fund in a deferred commission purchase structure.

Finance: What is the Tax Reform Act of 1986?
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What was the Tax Reform Act of 1986? Hit play to find out.

Finance: What are Passive Investing and Passive Investors?
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What are Passive Investing and Passive Investors? Passive investing and passive investors are ones who opt to ride the market out over the long ter...

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Finance: What is Automatic Reinvestment? 3 Views


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What is Automatic Reinvestment? Automatic reinvestment means that all of the money that investors make, “capital gains,” is reinvested into their plan. So they don’t take the money out as capital gains, they put it back into the same plan in hopes that it will grow even more.

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Transcript

00:00

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

00:09

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

00:14

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

00:19

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

00:25

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

00:30

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

00:34

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

00:38

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

00:44

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

00:50

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

00:56

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

01:00

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

01:05

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

01:09

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

01:13

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

01:18

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

01:24

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

01:28

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

01:32

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

01:38

.....8 years to double with the

01:43

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

01:48

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

01:52

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

01:57

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

02:02

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

02:05

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

02:10

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]

02:14

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

02:19

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

02:23

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

02:27

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

02:31

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

02:35

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

02:40

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

02:45

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

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