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  • FIRST POST
    • richtips86
    • By richtips86 21st Sep 16, 9:57 PM
    • 14Posts
    • 6Thanks
    richtips86
    Compounding Effects
    • #1
    • 21st Sep 16, 9:57 PM
    Compounding Effects 21st Sep 16 at 9:57 PM
    Over the last year I've started dipping my toes into investing in funds (well, building up a sum in VLS 100 Acc) and as I've been doing so, I feel there's something fundamental that I don't understand.

    Everything you read states, time in the market rather than timing the market which I'm fully onboard to benefit from the associated effects of compounding. I understand compounding in the sense of interest, but I am struggling with investments.

    Assume I bought 100 units in VLS100 Acc on 1 January 2016 and do not buy anything else for 20yrs. By 1 Jan 2036, I'm right in thinking I'd still have 100 units? However, I'd expect the overall value of the funds to increase by x? Where is the compounding? Is it behind the scenes so to speak which results in the overall value of the fund increasing exponentially? I think I struggle, because I feel for my investment "to compound", in my 1st year, my investment is 100 units, year 2 103.5 units etc.

    I'm know I'm asking a very basic question, but any insights would be gratefully received.

    Cheers, Rich
Page 1
    • TrustyOven
    • By TrustyOven 21st Sep 16, 10:41 PM
    • 367 Posts
    • 463 Thanks
    TrustyOven
    • #2
    • 21st Sep 16, 10:41 PM
    • #2
    • 21st Sep 16, 10:41 PM
    so by 2036 you'd likely have more than 100 units.
    Originally posted by MisterMotivated
    Not if you have Accumulation type units.

    (those will go up in price to reflect the dividends reinvested)
    Goals
    Save £12k in 2014 #192
    (£4115.62 / £5k) (82.3%)
    Save £12k in 2016 #041 (£1135.56 / £6k) (18.9%)
    • bigfreddiel
    • By bigfreddiel 21st Sep 16, 10:46 PM
    • 3,762 Posts
    • 1,710 Thanks
    bigfreddiel
    • #3
    • 21st Sep 16, 10:46 PM
    • #3
    • 21st Sep 16, 10:46 PM
    Some people don't understand the term ACC!

    Cheers fj
    • eskbanker
    • By eskbanker 22nd Sep 16, 12:36 AM
    • 3,407 Posts
    • 3,023 Thanks
    eskbanker
    • #4
    • 22nd Sep 16, 12:36 AM
    • #4
    • 22nd Sep 16, 12:36 AM
    Some people don't understand the term ACC!
    Originally posted by bigfreddiel
    ....so if OP is interested in more constructive help when starting from a declared position of needing a grounding in the basics, they should read articles like http://monevator.com/income-units-versus-accumulation-units-difference/ to understand how acc units reinvest dividends to achieve the compounding - you don't acquire more units as such but the acc(umulation) unit value increases more than the inc(ome) one, as you'll see if you chart the two variants of any given fund over time.
    • bigadaj
    • By bigadaj 22nd Sep 16, 4:48 AM
    • 7,345 Posts
    • 4,400 Thanks
    bigadaj
    • #5
    • 22nd Sep 16, 4:48 AM
    • #5
    • 22nd Sep 16, 4:48 AM
    Over the last year I've started dipping my toes into investing in funds (well, building up a sum in VLS 100 Acc) and as I've been doing so, I feel there's something fundamental that I don't understand.

    Everything you read states, time in the market rather than timing the market which I'm fully onboard to benefit from the associated effects of compounding. I understand compounding in the sense of interest, but I am struggling with investments.

    Assume I bought 100 units in VLS100 Acc on 1 January 2016 and do not buy anything else for 20yrs. By 1 Jan 2036, I'm right in thinking I'd still have 100 units? However, I'd expect the overall value of the funds to increase by x? Where is the compounding? Is it behind the scenes so to speak which results in the overall value of the fund increasing exponentially? I think I struggle, because I feel for my investment "to compound", in my 1st year, my investment is 100 units, year 2 103.5 units etc.

    I'm know I'm asking a very basic question, but any insights would be gratefully received.

    Cheers, Rich
    Originally posted by richtips86
    You can invest in accumulation or income units, the former keep the growth within the units, the latter pay it out.

    The net effect from each alternative should be the same, income pays out whereas accumulation keeps the income within the fund. So if you choose the income fund and reinvest the income receive the net amount will be pretty much the same, there may be minor differences in timings of reinvested income, charges etc

    So after your nominal twenty years you might still have 100 accumulation units but if you bought at £100 per unit they might now be worth £200 per unit. If you bought the income version and reinvented the dividend you'd have the same value, say £20000, but the unit price would be lower, so you might have 133 units worth approx £166 each.

    The way in which you hold the units doesn't affect the potential tax liability, so if you buy unwrapped, ie outside an USA or pension, you have a potential income tax liability in dividends and capital gains tax liability in growth. For that reason many people find it easier to buy income units for unwrapped investments as it makes tracking I mime and growth easier, accumulation is probably easier and better in an isa or pension.
    • george4064
    • By george4064 22nd Sep 16, 8:23 AM
    • 504 Posts
    • 520 Thanks
    george4064
    • #6
    • 22nd Sep 16, 8:23 AM
    • #6
    • 22nd Sep 16, 8:23 AM
    I can understand what Rich is trying to say, effectively with an accumulation fund the compounding effect happens in the background (as the unit price increases).

    However with an income fund or a listed company, income is paid out to investors which in turn they re-invest to buy more units/shares in said fund/listed company.
    "If you arenít willing to own a stock for ten years, donít even think about owning it for ten minutesĒ Warren Buffett

    Save £12k in 2016 - #045
    • lesta1980
    • By lesta1980 22nd Sep 16, 9:42 AM
    • 75 Posts
    • 12 Thanks
    lesta1980
    • #7
    • 22nd Sep 16, 9:42 AM
    • #7
    • 22nd Sep 16, 9:42 AM
    so let me get this right, the value of the unit increases not that you gain more units like I assumed? I understand the basics of ACC's, as in the overall pot should in theory increase, but that has cleared it up more for me i think?
    • george4064
    • By george4064 22nd Sep 16, 9:51 AM
    • 504 Posts
    • 520 Thanks
    george4064
    • #8
    • 22nd Sep 16, 9:51 AM
    • #8
    • 22nd Sep 16, 9:51 AM
    so let me get this right, the value of the unit increases not that you gain more units like I assumed? I understand the basics of ACC's, as in the overall pot should in theory increase, but that has cleared it up more for me i think?
    Originally posted by lesta1980
    Accumulation units = all income automatically rolls back in.

    Result? Unit price increases


    Income units = all income is paid out to unit holders.

    Result? If you re-invest the income received, your unit holding will increase as you have bought new units with the income just received.
    "If you arenít willing to own a stock for ten years, donít even think about owning it for ten minutesĒ Warren Buffett

    Save £12k in 2016 - #045
    • lesta1980
    • By lesta1980 22nd Sep 16, 10:09 AM
    • 75 Posts
    • 12 Thanks
    lesta1980
    • #9
    • 22nd Sep 16, 10:09 AM
    • #9
    • 22nd Sep 16, 10:09 AM
    Accumulation units = all income automatically rolls back in.

    Result? Unit price increases


    Income units = all income is paid out to unit holders.

    Result? If you re-invest the income received, your unit holding will increase as you have bought new units with the income just received.
    Originally posted by george4064
    Yeah I get the difference between ACCs and INCs. It's the actual model I didn't realise as I thought a unit was fixed and the compounding got you more units when it seems it's actually the other way round, the amount of units is fixed and the value increases
    • JohnRo
    • By JohnRo 22nd Sep 16, 10:14 AM
    • 1,949 Posts
    • 1,617 Thanks
    JohnRo
    A quick look at the returns of Lifestrategy 100 funds on trustnet helps explain the different nature of INC and ACC.

    With income reinvested both variants have the same performance figures over 1,3 and 5 years.

    VLS 100 ACC & INC | 25.6% | 36.3% | 87.0% |

    Without income reinvested ACC is unchanged as you'd expect, because there is no income to reinvest, but the INC variant has a very different set of numbers over the same 1, 3 and 5 year periods.

    VLS 100 ACC | 25.6% | 36.3% | 87.0% |
    VLS 100 INC | 23.2% | 30.0% | 73.3% |

    As per the thread title, this shows the compounding effect within the VLS 100 fund
    'We can't solve problems by using the same kind of thinking we used when we created them.' ― Albert Einstein
    'Facts do not cease to exist because they are ignored.' ― Aldous Huxley
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