Investing & Compounding - for us regulars

lpgm

J.Pricey wrote: »

Am I right in saying that share growth plays no real part in compounding? So whilst it's great to have that growth, the real aim is to get dividends to buy more shares. I suppose the key is that growth equals more dividends to subsequently reinvest?

I think you're focussing too much on compounding. Yes, some investors chase dividends. But many people, those who don't do paid work for example, are doing it to get their hands on the cash, not to buy more shares with them.

And some companies pay dividends when they can't really afford to. Or when it would actually be better to invest profits back in the business.

As others have said, it's all about total returns. Compounding may or may not play a part.

Audaxer

I really think you should forget about individual shares and look to invest in funds, which are essentially baskets of shares that give you diversification, so if one company goes bust you don't lose much if you are invested in just a few individual shares. A good place to start investing is in low cost globally diversified multi asset fund. Some examples are Vanguard LifeStrategy funds, HSBC Global Strategy funds and L&G Multi Index funds. Just investing in one of these funds gives you a low cost diversified portfolio with a risk/volatility rating of your choice. Higher risk/volatility versions (with 80% or more equities) should give you better long term returns, but with more ups and downs in value.

pjcox2005

I think you probably need to map your finances out first, income levels, current savings, what extra can you save per month and what you're trying to achieve and from there form what's best for you.


Typically people often do the following:


-Clear any debt
-Ensure you have a level of accessible savings to give security in the event of an unexpected issue - broken boiler, lost job etc. Some advise 6 months, although personally I'm happy to tie up more of my money.
-Are you using high interest accounts out there for savings - regular savers, current account offers e.g. nationwide I think have 5% for first year.
-Are you maximising any work pension including ensuring you get employer contributions (free money) and tax savings.
-Do you own a house, if not a LISA with the 25% top up would probably be next step.
-If doing all that, then investments will be key - I'd avoid shares which have higher transaction costs and put all eggs in one basket, and start with funds. It's mentioned a lot (some disagree) but Vanguard Lifestrategy funds are worth looking at.
-Is it worth using peer 2 peer lenders (Ratesetter, Kuflink, Crowdfunding) for riskier investments (i.e. could lose money) but higher interest and sign up offers.
-If you've got all those covered, then I'd suggest individual shares if you have an interest in them, want to take a punt on something either for growth or as a long term dividend - those owning Ocado shares were probably very happy this month, those invested in Carillion are less so.


All of those examples have the benefit of compounding - even savings account as mentioned in the example above.


And still make sure you get a balance to ensure you're happy with those decisions and enjoying life.

darkidoe

J.Pricey wrote: »

If share prices go down that can ultimately wipe out any gains made from compounding?

I.e. 100 shares for £1 each with 5% growth and 5% dividend = £110.25 For year 1. Then the same again = £121.56 For year 2. But if the shares suddenly drop by say 30% I've lost money but also lost the benefit of compounding right? In a major of speaking back to square 1 or worse.

The way to think about this point is the 'timeframe of your investment'. You stopped at Year 2 but there are many many years ahead if you are investing for the long term.

I know it is difficult psychologically but periods of drop like that shouldn't bother you that much. If fact, for some people, it is an opportunity to buy into the market at lower prices (you get more shares for the price), which for the long term is a good thing. Hence why regular investing is a good idea when you are accumulating wealth. This can really benefit your portfolio when the markets recover. However you cannot predict how long it can take to recover, hence long term planning is essential.

Have a plan where you are not forced to sell out when there is such a drop in the markets by having: Emergency Cash Fund, Insurance, Budget for near term expenses, Minimalism, Job stability. This is all very important for your psyche when prices fall and also have a long term goal.

In my own opinion, I think compounding really only starts to show it's effects after about 10 years, where you can start to see a slight exponential tilt in the growth chart.