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The “Magic” of Compounding



I’m sure that Einstein was nowhere near the first to recognize the benefits of compound interest but he is generally credited with describing compound interest as magic. Even more magic is the principle of dollar cost averaging which can work in two ways – both very effectively.


The first is to take advantage of the Dividend Reinvestment Plan offered by a large number of Australian companies. Instead of taking a small cash dividend you invest your dividend in buying more shares at the going price. It is extremely unlikely that your lifestyle will suffer if instead of getting a relatively small amount of extra money to spend you receive a modest increase in your holding of dividend paying shares.


The second is to set aside a regular monthly sum which is invested into a fluctuating market like a managed fund that will accept small regular increments like $100.


When I had 10 grandchildren I started a plan at $100 a month and increased this to $140 when the 14th grandchild arrived. They are all adults now and each received $6,000 from the fund on their 18th birthday. There was enough left to buy myself a small gift after I wrote the last cheque. (I should have increased the monthly amount with inflation but I didn’t).


You have the best of both worlds when you cann say “whoopee” either on a market drop when the shares are cheaper to buy, or on a market rise where your investment has increased!