Diversification Vs Compounding

In by Jasmin Lowry1 Comment

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Jasmin Lowry

Hi guys, love your podcast!!

I’m struggling to figure out how to get both the benefits of diversification as well as those of compounding at the same time. Diversification from what I understand is a way of lowering risk by spreading out invested money. However in my mind this seems to be in competition with the idea of compounding whereby if every dollar you had in the market were in the same well performing ETF for instance, compounding would be of huge benefit.
Can you shed light on how you balance the need for diversification vs wanting to make the most of compounding?
Cheers! Please keep making the podcast!!
Jasmin

  • Edit
    EquityMates

    Hi Jasmin,

    Diversification and compounding are not mutually exclusive.

    Diversification can come in many forms - investing in different asset classes, different countries, different indexes etc.

    If you wanted to diversify, by buying an ETF that tracked the ASX200, for example, you will still get compounding growth. For example, you invest $1000 in year one, and the index goes up 8%, then at the end of the year your portfolio will be worth $1,080. If the following year it then goes up another 8%, it would be worth $1,166.6, and so on (not including any dividends you get). So you can see you get both compound effect and diversification.

    Time is the best friend of compounding - the longer you keep it in there, the more chance you give it to do its thing.

    Hope that helps.