“Saving for Retirement, Mutual Funds versus Business Investing”
©2006 Brian Morgan articles
I recently was researching the internet for financial planning information; I found a really great article by Wendy Stevens on “The 7 Steps to Financial Independence”. Basically Wendy explains the needs for everyone to develop a “Financial Plan” so that they know how much they need to invest now to be able to retire with the type of income they’d like to have during retirement. I found that A.G. Edwards & Sons website had a very good financial planning and retirement planning resource. You simply type in the income you’d like to have during retirement and some other variables. Within seconds the website gives you a graph showing your future savings and investing results, and also shows the amount of savings that you are deficient for attaining a certain amount of income. A.G. Edwards & Sons website estimates that a good portfolio of investments usually can expect a 7.5% growth each year. It also takes into count social security income, and the years until you retire. What really shocked me was the 7.5% growth rate for portfolios; I thought that rate of return was rather low. So I did some more research; research about the best performing Mutual Funds. I found a Morning Star article that listed the 10 best Mutual Fund Managers and the rate of return on their best funds. There are mutual funds that are making over 100% growth rates in 10 years. A few actually have + 200% growth rates for a 10 year span. With a 200% growth rate, you double your money in 10 years. That is; a $10,000 investment becomes worth $20,000 in a 10 year period. That sounds much better than a 75% growth rate over 10 years as predicted by the A.G. Edwards & Sons website for portfolio successes. I then skipped over to Yahoo Finance and did some chart viewing concerning the mutual funds mentioned in the Morning Star article. The Morning Star article was correct; many of the mentioned mutual funds have a good 100% to 200% + return in 10 years. Then I decided to compare stock investments to the investments that I will have to make during my business start-up during 2007. I originally started the business in 2001; doing market research and talking to 15+ local business owners, SCORE, and the Small Business Development organization; to revise my businesses service and make sure that it was a potential reality. I am planning to “bootstrap” my business during start-up, which basically means that I plan to use my own limited funds in the promotions and marketing during the business’ start-up. Based on my forecasts and worst case scenarios, my net profit returns during the first year (12 months) will make investing in mutual funds seem like a weak investment vehicle.
In the worst case scenario; I will have to put about $500 per month into marketing and promotions during the 12 month period. This is a total investment of $6000 within 1 year. My realistic projections are that I will spend about $250 per month in marketing and promotions; and finish the business within 3 to 6 months. Using the worst case scenario for my start-up here are the financial figures: Marketing for 12 months, expense = $6000 Net Business Income for 12 months = $8,000 (gross $14,000) Worst case scenario return on investment = 133.3% growth The 6K investment returns a gross profit of 14K; a net profit of $8000. By using this information versus the mutual fund and portfolio projections, it seems rather silly to invest in the stock market versus investing in my business. Portfolio Investment Return 1 year = 7.5% 12 months Investing $6000 in a portfolio will be worth = $6450; $450 net profit Mutual Fund Return in 1 year = 20% = $7200; $1200 net profit Business Investment in 1 year = 133.3% = $8000 net profit A $6000 investment in a portfolio will net $450 dollars A $6000 investment in a good mutual fund will net $1200 dollars A $6000 investment in my business will net $8000 dollars Both the mutual fund & portfolio fund are considered passive investments, which means you put money into the market, and that is about the extent of your “work”. On the other hand, the business investment does require daily work (in marketing and promotions), and also required hundreds of hours of preparation and development - yet the return is 1777% greater than a portfolio return; and 667% greater than a mutual fund return. To make the same return with a portfolio would take = 17.7 years To make the same return with a good mutual fund would take = 6.7 years All the skills I learned in engineering school are helping me (finally) understand the reasons for starting my own business. $8000 is not a large income; but the business model is like that of a franchise; enabling the owner (me) to run duplicate niches (models) in about 4 cities before needing to hire employees. So if my business plan is indeed realistic; I can generate a net profit nearing $32,000 per year without any employees.
Author: Brian Morgan Contact: mailto:B-Morgan@Earthlink.net Brian’s Articles can be found by searching his name on www.esnips.com