Compound Interest on Vanguard Fund

mb6000

Hello
This may seem like an easy question but I am slightly confused - I pay monthly into a Vanguard Life Strategy Fund - same amount each month - so am I benefitting from Compound Interest / Compounding Effects?
Thanks
Matt

Audaxer

It's not interest, but you should get growth and dividend income. If your VLS fund is the Acc version you will not see the dividends but they will accumulate within the fund. By paying in monthly you are benefiting from what they call 'dollar cost averaging' in that in some months you will buying units when they are cheaper if the price has fallen. That is why you shouldn't be concerned when the value of your holding falls, as at these times you will be buying more units at bargain prices. So provided you are invested for the long term you should make good gains by making regular monthly investments.

lpgm

Yes, if you've got the accumulation shares, or you've got the income shares and you reinvest the income yourself. No, if you've got the income shares and you take the cash and run.

mb6000

Firstly thank you for the replies

I have a Life Strategy 100% Equity Fund - Accumulation

So I presume the fund automatically reinvests dividends etc as you mention above?

And compounding then, would be like investing in a savings account, whereby you keep the interest earned in the account (monthly or yearly), and don't withdraw it, then interest is then earned on the interest the following month / year?

Audaxer

mb6000 wrote: »

Firstly thank you for the replies

I have a Life Strategy 100% Equity Fund - Accumulation

So I presume the fund automatically reinvests dividends etc as you mention above?

And compounding then, would be like investing in a savings account, whereby you keep the interest earned in the account (monthly or yearly), and don't withdraw it, then interest is then earned on the interest the following month / year?

Yes, the income earned within the fund is automatically reinvested, similar to compounding of savings interest.

With 100% equities, you need to be prepared for equity crashes as they will happen and the value of your fund could drop by up to 40%, but it should always come back up as that is what happens in stock markets throughout history. Just don't panic and bear in mind that is a good time to keep buying monthly at cheaper prices.

Herbalus

Audaxer wrote: »

Yes, the income earned within the fund is automatically reinvested, similar to compounding of savings interest.

With 100% equities, you need to be prepared for equity crashes as they will happen and the value of your fund could drop by up to 40%, but it should always come back up as that is what happens in stock markets throughout history. Just don't panic and bear in mind that is a good time to keep buying monthly at cheaper prices.

As a new investor who has not been through this turmoil, is it perverse for me to look forward to the 30% crash because I can get some cheap units?

Unless of course it looks like the world is ending and I fall for the hype and sell out (low) to buy tins of baked beans... :rotfl:

KonkyWonky

Herbalus wrote: »

As a new investor who has not been through this turmoil, is it perverse for me to look forward to the 30% crash because I can get some cheap units?

Unless of course it looks like the world is ending and I fall for the hype and sell out (low) to buy tins of baked beans... :rotfl:

Assuming the next crash is 30%, that may be 5 years away. In that time the market may have increased by 50% so you would have lost out on significant gains by attempting to time the market.

Herbalus

KonkyWonky wrote: »

Assuming the next crash is 30%, that may be 5 years away. In that time the market may have increased by 50% so you would have lost out on significant gains by attempting to time the market.

Nope, I am pound averaging along the way!

Of course, if the crash is a long time away the I will have pound-averaged more and actually built up some serious investments from humble beginnnings. Who can say whether that would impact any feelings. A £300 loss from £1k portfolio is not the same as a £30k loss from a £100k pot!

AlanP_2

Herbalus wrote: »

Nope, I am pound averaging along the way!

Of course, if the crash is a long time away the I will have pound-averaged more and actually built up some serious investments from humble beginnnings. Who can say whether that would impact any feelings. A £300 loss from £1k portfolio is not the same as a £30k loss from a £100k pot!

It certainly is, or at least it will certainly feel like it.

Remember though it isn't a LOSS until you sell, it's just an OPPORTUNITY.