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Good question, and I too am wondering whether this is an error or deliberate. If deliberate, then I also don’t get it.

(I haven’t watched the videos.)

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In that exhibit, Abby contributes $2000 a year for ten years. Zak contributes $2000 a year for TWENTY years. Abby contributes $20,000 total. Zak contributes $40,000 total. Abby contributes half as much as Zak, but because of compounding, she ends up with the same amount.

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In exhibit D, both appear to be contributing 2000 per year. Zak starts ten years later, and finish with 500 bucks less. Is this supposed to motivate to start earlier, or demotivate?

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Also, I didn’t realize it was financial literacy month, but I just started a series on investing for young adults in their twenties over on my blog (shameless plug, I know). Please check it out and leave me any comments or suggestions you may have. Thanks!

http://www.ryanwaggoner.com/2007/04/02/investing-for-young-adults-part-1-financial-goals/

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If you are adding savings each year (and then eventually taking money out each year), the differences can be huge, and it is very possible to have a lower average return result in more money than a higher average based on WHEN returns happen for each. Typically, the higher the average return, the wider the range of possible one year returns (risk vs. reward).

For the long-term investor, this is market volatility risk and is much more than just a “paper loss.” It can mean the difference between spending your golden years relaxing or greeting shoppers at Wal-Mart.

If you don’t believe it, try it on an Excel spreadsheet. Throw down a wide range of returns that average 7%, 8%, 9%, or 10% for 10 years For example: for a 10% average return, most of the years should be between -10% and +30% with 2 or 3 years being outside that range (you can also use historical index numbers). Then add $1,000 each year, and calculate your ending balance. Compare it to using the average return number for all years. Now change the order of returns and note the differences. Try it several times, put a bull market at the beginning, then do it with one at the end. You’ll get a different answer each time, all with the same average return. Now imagine the effect over 20, 30, or 40 years or with larger contributions. Try it with withdrawals too.

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http://finance.yahoo.com/expert/article/yourlife/27943

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FT

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This guy seems like a straight shooter. I understand compounding, and I’m looking forward to the next entries. There are several subjects he’s going to cover that I likely don’t understand as well. Good stuff!

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