UK consumers spent on average £544 celebrating Christmas in 2017, according to a study by Deloitte. Imagine what you could get back if that cash was, instead, invested in the stock market for a reasonable period of time - say 10 years.
What would the returns look like if you took advantage of compounding and reinvested dividends?
THE POWER OF COMPOUNDING
Funds are useful for investors because they offer exposure to a range of themes, geographies and companies via an expert investment manager, for a fee.
Over the last 10 years, the average annual return on UK equities was 5.9%.
Let's suppose that UK markets perform similarly over the next 10 years. That would imply nearly doubling your £544, growing the cash pile to £965.20, thanks to the power of compounding.
In 20 years at the same annual rate, £965.20 could turn into £1,712 assuming you invest nothing more than the original £544.
The longer you hold an investment, the greater the power of compounding is - and the more your money grows.
THE BENEFITS OF REINVESTING DIVIDENDS
Another way to accelerate returns is to reinvest dividend income. If you get £50 in dividends every year and reinvest them, your returns would rise from £544 to £1,914 in ten years.
In 20 years, the gains are even higher with returns nearly tripling to £5,761.
Funds labelled ‘acc’ automatically reinvest dividends instead of distributing them as cash dividends, making it easier for investors to take advantage of this strategy.
WHAT CAN TRIP YOU UP?
Dealing fees can eat at returns and make investing more expensive than it has to be.
One of the best ways to avoid spending too much on fees is to not trade too frequently as these can quickly drive up costs.
