I’m sixteen years old and I want to build up a stable investment foundation. I’m not looking for financial advice, I’d just like to know how compounding interest works.
I’ve been looking at things like managed funds which say they offer 12% annual interest rate. If I was to reinvest every year I would experience exponential growth in say, 40 years. Is it possible for these managed funds to underperform and completely ruin my investment? I was also curious if things like index tracking funds and ETFs offered similar compounding possibilities?
In: Economics
First, I highly suggest subscribing to /r/personalfinance and reading the FAQ of that subreddit.
> managed funds which say they offer 12% annual interest rate
What product offers this? It sounds too good to be true.
> If I was to reinvest every year I would experience exponential growth in say, 40 years
I think you are confused about a couple terms.
– “Exponential growth” means “increases by a percentage every year.”
– “Reinvest” usually refers to using dividends from an investment to buy more.
> Is it possible for these managed funds to underperform and completely ruin my investment?
Underperform? Yes. Completely ruin? It depends on what is meant by “ruin.”
> if things like index tracking funds and ETFs offered similar compounding possibilities?
Yes.
There’s really no reason to invest in managed funds. Managed funds charge high fees, but a lot of studies have shown they don’t outperform index funds with much lower fees. A company might have dozens or hundreds of managed funds. By chance some of them will do better than others.
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