Compound Interest

Beddie

22225 said:

Hello, regarding compounding, I understand it is a lot more complex than with compounding in savings with interest. Does anyone know why then do people on the internet and Netflix  like Ramit Sethi who are self proclaimed financial 'gurus' go on and on about starting investing as early as you can because of compounding? He said you can hopefully expect 7% returns over the long term. He must be a little bit right surely otherwise Netflix wouldn't let him say it??? Or am I being naive.

They are talking about compounding in terms of reinvesting. It does not need to seen in a complex way and it works at any growth rate.

So your £10k makes 7%, that's £700. You take it out and spend it. Next year you get another £700, great, let's spend that too. No compounding.

But what if you bought more investments with your £700? So next year you get 7% of £10,700. And so it goes on. With income funds you buy more yourself, with accumulation funds it's happening automatically inside the fund.

Of course the performance will vary, but over time your investment has benefitted from compounding, because you made returns on your returns.

22225

Thank you Altior and Nomore

22225

Thank you all
I get it now

22225

Thank you Beddie

eskbanker

katejo said:

grahamgoo said:

With investments vs savings you are comparing certainty of a fixed return of a savings account with potentially higher but not guaranteed returns of investments.  Generally investments do outperform savings accounts over the longer term, but it's not guaranteed and it can be a bit of a roller coaster.  You should also make sensible choices regarding what exactly your money is invested in.

I currently have a unit trust (started 3 years ago) which is feeding the max £20K into a stocks and shares ISA annually. The ISA has gained value but the value of the unit trust has stayed the same (apart from amounts transferred into the ISA). It hasn't gained interest. A financial adviser wants me to pay more into the unit trust (suggests £500 a month because he thinks I am keeping too much money in cash savings accounts). I am reluctant. I asked for an explanation as to why the unit trust fund wasn't gaining interest but didn't understand the explanation. I am planning to retire in around a year from now and think I could lose out if I need access to the money in the relatively near future. Your comments above appear to support my fears.

What's the name of the unit trust?  Unit trusts don't 'feed money into' S&S ISAs, and the ISA is just a wrapper within which the value of specific investments fluctuates, i.e. there's no concept of ISAs changing value independently of the underlying investments, so there may be some confusion about exactly what's going on here....

Edit: rereading this, are you perhaps saying that you've invested in a unit trust in an unwrapped account, and are selling units in order to deposit the proceeds into an ISA?  If so, what are you buying with that money once within the ISA?

If you've engaged a financial adviser but don't understand their explanations, then they're not doing their job if you feel the need to ask anonymous strangers on the internet what they were meaning, so you may need to push them harder and/or reconsider your choice of adviser!