Compounding is what makes one investor wake up richer everyday while another remains where he or she is.
Compounding is simply the process of exponential increase in the value of an investment. When used in finance, it is as a result of the extra earning interest or profit based on the invested capital as well as the re-invested gains.
Compounding is what makes one investor wake up richer everyday while another remains where he or she is. This exponential growth is as a result of time, interest rate, and increase in capital.
However, there are some things investors who want to increase the benefits or power of compounding do to increase their odds at the big gains. Here are some of them.
Find Securities With High Rates of Return
One of the components of increase is interest rate or profit rate. It is impossible for an investor with an interest rate of 3% to grow faster than an investor who makes 10% in his or her portfolio – at least not unless the investor making 10% is doing something terribly wrong.
Wealth managers and investors who manage portfolios so as to optimize their gains, do so in order to minimize losses and not necessarily to earn more money. As such, in order to accelerate the power of compounding, you might want to focus on higher interests. However, do so whilst being cognizant of the risk element it attracts.
Be Careful With Fees – Also watch your expenses
Fees might not be so pronounced when you are handling your stock investments yourself as an investor. However, if you go through wealth managers, you might pay a few more fees in terms of commissions and taxes.
The investor who wants to earn more money is conscious of the various ways to lose money. Asides what you need to pay as advisory fees, be also conscious of the fees that come with various investment vehicles.
The fees that catch us unawares are the ones that hurt us the most. This follows closely with watching your expenses. If you are one to spend your profits or earnings as they come, then you are on your way to keep moving around in circles.
Ensure that your profits or dividends are immediately invested instead of just sitting in your bank account or you might be tempted to spend it. Understand that even where there might be market volatility, having enough money in your investment vehicles would be able to cushion losses and ultimately make you reap amazing benefits at the end of the day.
Invest For The Long-Term
Again, compounding cannot take place where you are investing for ‘now-now.’ As the popular saying goes, it is not about timing the market but how much time you are in the market that matters.
Stock investments do not increase steadily, but if they are managed in the right manner, their gains in the long term would still be exponential especially because of the increased value of the money invested. Focus on the long term by completely ‘forgetting’ that you have invested and your gains might even shock you.
Written by Lawretta Egba.
