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Compounding is when an assets earnings are reinvested to generate additional earnings over time. This means earning returns not only on an initial investment but also on the accumulated returns received. By remaining invested and allowing the returns to compound, investors may achieve exponential growth over time. Even small contributions made consistently over the long term may lead to remarkable wealth accumulation due to compounding.
START EARLY
Time is one of the keys to unlocking the potential benefits of investment compounding. The sooner an investor starts investing, the more time that money has to grow. When dividends earned are regularly reinvested, those returns have the chance to compound significantly over time. Starting early and taking a long-term approach is key to realising the full impact of compounding.
MARKET VOLATILITY
Investing for compound returns requires a long-term perspective. Rather than trying to time the market, which can be risky, hard to do and unpredictable, compound investing relies on the power of time and can help smoothen the ride of market volatility. Over the long term the benefits of staying invested and allowing compounding to work can outweigh the short-term ups and downs of the market.
For example, the chart below shows the growth of an investments of $10,000 with a 3% p.a. interest rate, compounded monthly over a period of 10 years. Without contributing any additional money into the investment and from compounding alone, the investment would increase by close to $3500 within the 10 year period.
A LONG-TERM MINDSET
Investing for compound returns requires patience and a long-term mindset. In the early years, the growth may seem slow and immaterial, but as time goes on, the compounding effect becomes more pronounced, and the growth curve steepens. Staying committed to an investment plan and having the patience to weather market volatility is essential to realising the full potential of compounding.
Remember, investing for compound returns is a strategy that can turn small, consistent investments into significant wealth over time. Reinvesting earnings and maintaining a long-term mindset are essential elements in making the most of compounding. Every dollar invested today has the potential to grow exponentially in the future, making investment compounding an essential tool for building wealth and achieving financial goals.
DISTRIBUTION REINVESTMENT PLANS (DRP)
A DRP is a great way to increase your holdings of units in a fund. It is the process where investors can reinvest their distributions to obtain additional units in the fund. This allows investors to accumulate more units over time and potentially benefit from compounding returns.
Magellan believes in investing in high-quality companies over the long term.
At Magellan, we believe that successful investing is about finding, and owning for the long term, companies that can generate excess returns on capital for years to come. We scour the world for the best companies that we believe have a sustainable competitive advantage that will compound returns for our investors over the long term. We seek to own high-quality stocks and let compound returns work their magic over time.
Important Information: This material has been delivered to you by Magellan Asset Management Limited ABN 31 120 593 946 AFS Licence No. 304 301 (‘Magellan’) and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation. This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should obtain and consider the relevant Product Disclosure Statement (‘PDS’) and Target Market Determination (‘TMD’) and consider obtaining professional investment advice tailored to your specific circumstances before making a decision about whether to acquire, or continue to hold, the relevant financial product. A copy of the relevant PDS and TMD relating to a Magellan financial product may be obtained by calling +61 2 9235 4888 or by visiting www.magellangroup.com.au.
Past performance is not necessarily indicative of future results and no person guarantees the future performance of any financial product or service, the amount or timing of any return from it, that asset allocations will be met, that it will be able to implement its investment strategy or that its investment objectives will be achieved. This material may contain ‘forward-looking statements’. Actual events or results or the actual performance of a Magellan financial product or service may differ materially from those reflected or contemplated in such forward-looking statements.
This material may include data, research and other information from third party sources. Magellan makes no guarantee that such information is accurate, complete or timely and does not provide any warranties regarding results obtained from its use. This information is subject to change at any time and no person has any responsibility to update any of the information provided in this material. Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Magellan. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. No representation or warranty is made with respect to the accuracy or completeness of any of the information contained in this material. Magellan will not be responsible or liable for any losses arising from your use or reliance upon any part of the information contained in this material.
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