How “snowballing” your investments could boost your long-term returns

“Snowballing” could help your money grow at a faster pace when you’re investing over a long-term time frame.

Imagine you’ve made a snowball and you’re rolling it through more snow – it’ll increase in size at a faster and faster rate as the surface area grows. The same principle may apply when you’re investing thanks to the compounding effect.

The effect of compounding could mean your investments grow at a faster pace in the long term

In simple terms, compounding works when you leave the interest or investment returns your initial deposit makes in your account to generate further gains in the future.

Calculations from Barclays highlight how compounding investment returns can grow over a long-term time frame.

Let’s say you invest £10,000 and it returns 2% after the first year – the value of your investments will have grown by £200. Assuming you don’t withdraw any money, during the second year, you’ll earn returns on your initial £10,000 investment and the £200 return. So, if you again made returns of 2%, you’d benefit from a £204 boost.

Over time, the effects of compounding become more pronounced. After 20 years of 2% growth, your initial £10,000 would have grown to £14,859.

If you’d withdrawn the returns each year, you’d have around £859 less in your pot at the end of the 20 years.

Depending on your circumstances and risk level, you might expect to see higher returns than 2% on your investments, so the effects of compounding could be even larger.

The power of compounding could help your investments snowball, especially when you’re investing over a long time frame. For example, you might be investing for your retirement over several decades, so there’s a greater opportunity for your returns to be reinvested and deliver further gains.

However, keep in mind that investment returns cannot be guaranteed and there is a chance the value of your investments might fall.

5 practical tips that could help you have confidence in your long-term investments

While the figures show that compounding investment returns could help you get more out of your money, sometimes it’s difficult to leave your money where it is and stick to a long-term plan. If you’re tempted to make changes to your investment strategy, these five tips could help.

1. Review your financial goals

When you first invest your money, you should consider what your reasons for investing are. This allows you to create an investment strategy that’s tailored to your aspirations.

So, if you’re thinking about making changes to your investment portfolio, going back to these goals might be reassuring. If your goals remain the same, what else is driving you to update your investment strategy? It could highlight where emotions or bias are playing a role in your decisions.

That’s not to say you should never update your investment strategy. If your goals or circumstances change, a review could help ensure your investments remain appropriate for you.

2. Outline your investment time frame

It’s often advised that you invest with a minimum investment time frame of five years. This provides an opportunity for market volatility to smooth out.

When you’re investing, the value of your investments will likely fall at some points as market volatility is normal. While it can be scary, withdrawing money from your investments could mean turning paper losses into real ones.

Similarly, while you might consider withdrawing returns, doing so could mean you miss out on the compounding effect.

So, before you make a withdrawal outline your initial time frame and consider the implications of accessing the money sooner.

3. Take a long-term view when reviewing investment performance

As investment markets can be volatile, taking a long-term view of investment performance may be useful. Rather than looking at the returns delivered over weeks or months, consider the performance over several years where possible.

While returns cannot be guaranteed, markets have historically delivered returns over a long-term time frame. By looking at performance over the years, you can see the overall trend rather than the peaks and troughs that market movements may cause.

A long-term view is also useful when you want to understand the effect of snowballing.

4. Consider what’s an appropriate level of financial risk for you

One of the reasons some investors consider making changes to their investment strategy is due to risk. You might feel uncomfortable taking financial risk and worry when volatility means the value of your investments falls. Or you may be a risk taker and keen to increase your potential returns by taking on more financial risk.

However, as well as your attitude to risk, other factors play a role in what is an appropriate level of risk for you, such as other assets you hold and your reason for investing. Understanding your risk profile could help you make decisions that are right for you.

If you’d like to understand what is an appropriate level of risk for your circumstances, please get in touch.

5. Work with a financial planner

Finally, working with a professional financial planner could mean you have someone to turn to when you have questions about your investments or you’re tempted to make impulsive changes. Sometimes an outside view can help you review your finances from a different perspective and highlight how to make the most of your finances over the long term.

If you’d like to talk to us, whether you’re an existing client or are interested in understanding how a financial planner might work with you, please get in touch.

Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.