Factors Affecting Compounding

  • Interest Rate: Higher rates mean your money grows faster.
  • Contributions: Adding money regularly boosts the compounding effect.
  • Time: The earlier you start, the more you benefit from compounding.

2:Diversification matters too

Diversification is a way to manage risk by spreading your investments across different types of assets and different assets. The idea is that having a mix of investments will generally give you better returns, and lower risk compared to putting all your money into one type of investment.

Why diversify?

Risk Reduction: Imagine if one of your investments doesn’t perform well. Diversification helps cushion the blow, so your overall portfolio stays strong.

Perhaps you have already heard about the infamous example of Wirecard? Wirecard was a German payment processing company that became embroiled in one of the biggest financial scandals in recent history. In 2020, it was revealed that Wirecard had falsely reported having €1.9 billion in cash that simply did not exist. This massive fraud led to the company’s collapse and its executives facing criminal charges. The impact on retail investors was significant. Many individuals who had invested their savings in Wirecard saw the value of their shares plummet to nearly zero. The scandal not only wiped out their investments but also shook their trust in the financial markets. It highlighted the importance of due diligence, and the risks associated with investing in individual companies.

Smooth Returns: Diversification acts like a stabilizer, keeping your investment returns steady and less bumpy over time.

Opportunities for Growth: By spreading your investments across different sectors and markets, you open the door to more chances of earning higher returns.

Note: Investment risk refers to the uncertainty regarding the returns that an investment will generate. All investments carry some degree of risk, and it’s essential to understand the types associated with different asset classes. Stay tuned for week 4 to learn more about that!