Compounding question

FrankN1

Hi there,

Just wondering with regards to compounding, how do it work on a monthly basis? For example if I drip feed 100 per month over a year. And the annual return is 10%, do I earn more than 10% of 1200 (120) in year one?

Thanks in advance.

Buddy Bubs

No, because you only have 100 invested for a full year, not 1200. You have another 100 invested for 11 months, another for 10 months.........another for only 1 month. If returns are linear, without getting into too much maths, you will earn 60 euro.

However in year 2, if the return is still 10% you will earn more than 120 because you now have your original 1200 will earn 120 and the 60 from year 1 if reinvested returns earning 6 so that's 126 and your year 2 contributions will earn 60 so 186 in total.

In year 3, you have 1200 plus 1200 plus 186 invested at start of the year so your 10% will earn 258.60 on this on top of your returns for year 3 contributions.

This is what compounding is, and it relies on you reinvesting your returns, not taking them as income each year.

Note that 10% returns after charges and taxes is pretty fanciful on a long term basis for any investment

FrankN1

Thanks a lot.

Is DeGiro the best platform to use still or is there anything better that most people are using now?