According
to legend, a Dutch trader named Peter Minuit bought the Island of
Manhattan from the Lenape Native American Tribe for $24 worth of
glass beads and other baubles. On the surface, this seems like a
terrible-even predatory-deal. But if we look closer, we may find
a different story.
If
the Lenape tribe had invested their $24 and earned a return of 6.25%-
and didn't take any withdrawals- they would have $371.1 billion
by the end of 2006. This outpaces the value of the land they sold.
The New York City Department of Finance estimated the property value
of all of Manhattan to be around $200 billion in 2006.
And
6.25% is considered a rather low rate of return in modern investing.
It is equivalent to what the bond market is returning in recent
years. What if the tribe had taken a slightly riskier investment
strategy? Assuming an 8% return on investment, the tribe would have
$151 trillion today. Maybe selling the Isle of Manhattan wasn't
such a bad deal after all!
Of
course, the Lenape Indians did not have the financial tools and
investment knowledge that we have today. You, however, can put the
power of compound interest to work. Due to the miracle of compound
interest, even tiny amounts of money can become large ones very
quickly. Put this to use in your retirement portfolio, and watch
your nest egg grow!
