Updated: 1/24/2010 8:34 PM ET|
Investing isn't just for rich people
By following a few basic principles, investors who start small can amass an impressive portfolio.
For more than 40 years, Earl Crawley has been a parking lot attendant, never earning more than $20,000 a year. So how did he build a net worth of more than $1 million? Nickels and dimes, he says.
"Stop working so hard, and let the money work for you," says the Baltimore resident, who struggles with dyslexia.
Crawley is an excellent example of someone who mastered a few key investing basics:
- It's OK to start small.
- Steady contributions add up.
- Quality companies matter.
They're the same bedrock principles any investor can use to build wealth over time. Crawley uses a lot of the techniques employed by famous investors such as Warren Buffett and George Soros, says Pat Terrion, a University of Connecticut business instructor and principal of Founders Capital Management.
Crawley started saving money at age 13, when his mother sent him to work at a fruit stand to help support the family. The quarters he was allowed to keep went to savings stamps and eventually to savings bonds. "I knew the money wasn't there to be thrown away," Crawley says.
By the late 1960s Crawley was married and raising three children on just $80 a week as a parking attendant at a bank. A banker took him aside and said his limited education meant Crawley had a limited future with the bank. The man suggested Crawley invest in the stock market. Crawley began investing $25 a month in mutual funds.
Mutual funds buy and hold shares of hundreds or even thousands of stocks, bonds and other assets. Spreading the money around in such a way decreases the likelihood that a problem with any individual company can torpedo an investor's results. There are about 8,000 mutual funds available, and they cater to all levels of risk, investor goals and other characteristics. With just a little research, investors can easily select a fund that suits their goals.
Crawley's strategy of investing a fixed dollar amount at regular intervals is called dollar-cost averaging. This way, investors avoid buying a large number of shares when the market is high -- and when buying stocks can feel like the right thing to do -- and capitalize on times when the market is low -- precisely when it's the scariest.
Staying the course
Crawley used this method for 15 years, at which point he had $25,000. His confidence boosted, he set aside the money he'd earned from side jobs such as mowing lawns and cleaning windows and used it to purchase a single share of IBM (IBM, news) in 1981, the year the stock closed at $55.
Contrary to many investors' habits, it is this slow and steady approach that is most likely to net wealth, opposed to knee-jerk buying and selling of stocks based on insider tips and market whims. Try setting up an account that each month automatically invests a small sum -- say, $50 or $100. Even that $50 a month would grow to $73,000 over 30 years at an average annual return of 8%. With $100, the ending value would balloon to about $147,000.
Terrion notes how impressive it is that Crawley held steady in his investments even during the 1970s, a period when the stock market plummeted by 45% over two years.
"He was disciplined even when times were tough," Terrion says. "People want a quick dollar, but the road to wealth should be a slow road, like the story of the tortoise and the hare."
Indeed, the market saw an uptick in the 1980s -- just in time for Crawley to pay for his son's high school and college.
The beauty of blue chips
Since that first share of IBM, Crawley has stuck to investing in blue-chip companies he understands and can see thriving in the long-term. Such companies include Caterpillar (CAT, news) and Coca-Cola (KO, news) -- companies that have easy-to-understand products and are known for reliably rising dividends.
Dividends are what companies pay back to investors after they've reinvested in themselves. Unlike many small, fast-growing businesses that need to keep their profits in house to continue growing, many big companies pay out roughly half of their profits in the form of dividends. Crawley reinvests all those dividends, and it is easy to understand why: If an investor had bought a share of Coca-Cola for $40 when the company went public in 1919, that investment would be worth more than $4 million today.
"Instead of taking those dividends and pocketing it, I let them sit and reinvest themselves, and that increases my shares," Crawley says. "The more shares I have, the more dividends I have, and eventually the more money I'll have down the road."
Dividends have made a big impact on the market as a whole -- accounting for one-third of the Standard & Poor's 500 Index ($INX) total returns since 1979. Dividends have made a big impact on individual investors, too. If you invested just $1 in large-company stocks in 1925 and reinvested all dividends, that buck would have grown to $2,049.45 by 2008 -- an annual growth rate of 9.6%. If the investor of that dollar had received no dividends, the appreciation rate would be just 5.3% a year, and that dollar investment would have grown to only $70.79.
Lessons learned -- and shared
Today, Crawley's investment portfolio holds $500,000, he carries zero credit card debt and he owns his home outright -- that's right, no mortgage.
Economics gadfly and funnyman Ben Stein sees Crawley as a hero. "Mr. Earl is properly motivated. He decided he did not want to be destitute and to have a decent, comfortable life. He went to the trouble to set aside money each month and create and execute a plan," Stein says. "He should be on a postage stamp."
While Crawley's financial picture has been on an upward swing for most of his life, it has also come full circle. Today, his parking lot customers ask him for financial tips and he gifts shares of his portfolio to beginning investors as well as a local church, where he started an investment club. "It makes me feel good to see someone take my advice," he says.
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