Investors know that there is no silver bullet to build a profitable investment portfolio. What works for one person may not suit another – our investment goals, assets and attitude to risk mean that designing your own investment strategy is a very personal choice. However, building a personal investment portfolio should be treated as a long term goal for most of us. And with time on your side, one investment strategy that can pay huge dividends for most people, is reinvesting.
Reinvesting yield works to accelerate the growth of your investment portfolio in several different ways – and the effect of growth on your capital, future earning potential and portfolio balance can be transformative.
Leverage compound growth
By reinvesting yield from your investments you are able to leverage the compounding effect. If you use investment return from this year to grow your base of invested capital, then next year you benefit from having more capital reaping rewards for you. Your annual earnings, in interest, is then even higher. By continually reinvesting this profit you benefit from the snowballing effect – as you earn from both your initial capital and the earnings you have reinvested and grow your invested capital at pace.
Diversify your portfolio
By reinvesting your portfolio income you are able to further diversify your portfolio – a key strategy to mitigate risk. When you invest on Bondora you receive both principal repayments and interest on a monthly basis. This allows you to reinvest earnings into new loans, spreading your investments and mitigating the risk of an individual default on your portfolio.
Grow future income
If your investment goal is future financial wellness then reinvesting returns today is a good way to grow your future income. By quickly growing your deployed capital you have an ever larger pot to put to work generating income in future.
Rebalance your risk profile over time
Reinvesting your yield over time also gives a great opportunity to grow and develop your portfolio risk profile over time. Personal circumstances dictate the levels of risk and potential return that are attractive to us. For example, someone investing at aged 20 for their retirement may be happier to take on more risk and greater potential reward, than someone five years off retirement making the same investments. By redeploying the yield you earn on a regular basis you are able to decide over time which investments suit your needs and evolve your portfolio accordingly.
Reinvesting and peer-to-peer lending
In peer-to-peer lending reinvesting your returns is an effective strategy for many individual investors, including those who choose Bondora as part of their balanced portfolio. Here is an example of what could happen to your Bondora portfolio if you decide to reinvest your returns over time.
This graph only illustrates the potential effects of reinvesting and is not meant to be taken as financial advice.
Assumptions made to illustrate the graph
1) Investment duration: 5 years (60 months)
2) Investment amount: €10,000
3) Annualized expected return using balanced strategy: 14,73%
4) Blue line: original deposit invested, all receivables not reinvested
5) Orange line: original deposit invested, all receivables reinvested
This graph illustrates the investment value over time, showing what happens with your money if you decide to reinvest all receivables VS not. The orange line shows that in the 5 year time frame, by reinvesting, your original investment amount would grow by over 70% (€7125). If you do not reinvest, the growth would be 30% (€3000). By not reinvesting you would roughly lose 58% (€4137) of the potential net profit over the 5 year time frame.
Bondora’s fully automated investment tool makes investing effortless because it’s built in a way that it reinvests your all receivables automatically – the investor just has to select its desired risk-return and click “Activate Portfolio Manager” on the dashboard.