Investing is a long-term strategy to build wealth, and coming up with the right approach, can involve a key concept not all of us are familiar with: compound growth. You may already be familiar with some similar terms, such as compound interest, but compound growth provides a unique strategy investors of all experience levels can use to complete their portfolios. Here’s a look at compound growth and why it’s essential for any portfolio.
What Is Compound Growth?
The simple definition of compound growth is the growth rate of an investment over a specified length of time, referencing investments that are held for a multi-year span of time. By looking at assets in your portfolio that are held for longer, you can get a better idea of how your portfolio might perform over time. Annual rates of return can be volatile, even for some investments that tend to be more moderate risks. Compound growth rates show smoother performance over time instead of focusing on the ups and downs of investments from year to year.
However, it’s not just a mathematical equation to use as you review your portfolio’s past performance. You can use compound growth to model your investments’ future performance or make educated decisions about how to approach the assets in your portfolio. For example, you can look at the future performance of REIT investments over time by switching out some key variables. By comparing potential performance with and without reinvesting dividends, you may see your compound growth rate increases when dividends are reinvested. You can also look at the difference between investing for 5 years or 10 years with both variables.
Benefits for Investors
Long-term investing strategies can provide more stable growth over time and may be subject to less volatility than other options, such as stocks. By implementing a strategy using compound growth, you can realize higher returns in exchange for less liquidity. DiversyFund provides a way to invest in multifamily real estate assets for the long-term, giving you the chance to reinvest dividends as discussed above. To accelerate the growth, many investors choose to utilize automated deposits consistently over time for steady long-term gains. By combining dividend reinvestment and automatic contributions to your REIT account, you can diversify your portfolio and put the power of compound growth to work for your wealth-building plan.
Common Applications
Even if you aren’t an experienced investor, you may already be taking advantage of compound growth without realizing it. For example, if you have your whole life insurance policy set to reinvest dividends instead of paying them out, you’re using compound growth to increase the value of your policy and the overall return of your investment. Some other financial accounts or investments you may already be familiar with that use the ideas of compound growth include:
- Money market accounts
- Certificates of deposit
- HIgh-yield savings accounts
The main concept that connects all these investments is the idea of holding them for the long-term. High-interest savings accounts and money market accounts allow you to accrue interest on both the principal and the interest you’ve already accrued. Certificates of deposit can be rolled upon maturity, so you can reinvest the dividends into new CDs with even more growth potential.
Compound growth does not guarantee rates of return, nor does it guarantee the performance of any investment. However, implementing the strategy of holding long-term investments, reinvesting dividends, and looking for ways to automatically contribute to your accounts each month can help you create a diverse portfolio with the potential to perform better over time. Whether you’re preparing for retirement or getting ready to create a nest egg for your family, these long-term approaches to investing may make planning for major life events easier. Of course, it’s important to speak to your financial advisor about any questions you might have and to help you come up with a plan that meets your personal needs and goals.