Stocks and compounding

POSTED BY rajat sharma ON July 29, 2013 12:37 am ONE COMMENT

Dear sir,

 

I have started earning a few years ago and already have an RD, ELSS investments for every financial year, Fixed deposists and sweep-in enabled in my savings account. I thank all of you for investment decisions i’ve made. Most of the personal finance forums i visit including JI encourage investors to start early for single reason, compounding i.e. giving time for investment to grow. But at the same time you people also encourage youngsters like me to diversify and invest in stock markets and mutual funds (for supposed risk-taking appetite due to less responsibilities).. what i don’t understand is how can compounding and shares go hand-in-hand?? stocks are totally un-guaranteed instruments and it is entirely possible that even after 5-6 years stocks remain at same levels (granted transient fluctuations).. how does compounding work with stock markets? or are you only suggesting investors to invest in debt-based MF’s i.e. ‘stock based products which resemble compounding returns’..

You may say that stocks generally go up in the long term, but since this presumption is totally a guess, is it wise to relate stock based returns(if any) with something as precise and as mathematically verifiable as compounding??

One reply on this article “Stocks and compounding”

  1. compounding formula must be used correctly for stocks.

    Read this:
    http://freefincal.com/2013/06/27/understanding-the-nature-of-stock-market-returns/

    Also read another article in my blog:

    Understanding Volatility of Investment Returns with a Portfolio Rebalancing Simulator

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