When you’ve reached your time horizon for your investment, you’re likely to need the money for your goal. If so, reinvesting any returns you’ve made wouldn’t be the best decision.
However, depending on what assets you’ve invested in, you may get investment returns (usually through dividends, or coupon or interest payments) even before you take your money out. If this happens, what should you do with it?
You may be tempted to use these returns as part of your spending money. But before you do that, keep reading to see if reinvesting them (a process also known as compounding) would be better.
Why are you investing?
The answer to this basic question can lead you to the best next move for you. After all, what you should do with your money depends on your plans.
If you’re investing so that you’ll have more for spending or to replace part of your income (for example, because you’d rather use the time you spend on a sideline for quality moments with your family), then these returns are exactly what you’re looking for.
If, however, you’re investing to have a certain amount of money by a certain date, think of what happens if you reinvest the returns.
Because you’ll have additional money to earn from, your investment can grow faster even if the rate of returns remains constant. That means you might reach your goal earlier than expected or reach a higher amount if you stick to your original time horizon.
Of course, if your original plan included reinvesting the returns, then you should do that. Otherwise, you risk not achieving your goal.
Things to remember
You’ll only have to think about this if you already have the returns. Compounding doesn’t happen for paper profit, which refers to the returns you haven’t taken out of your investment.
Also, if you didn’t include reinvesting returns in your original plan and find that it’s is the best decision for you, keep in mind that you don’t always have to put your money in the same product as your original investment.
If you see an alternative that might give you acceptable performance, it would definitely be worth considering. This is especially true if, by putting the returns in a different product, you would be diversifying your portfolio even further.
If you reinvest in the same product, you may choose to adjust your time horizon for the goal. After all, you’ll be earning faster than before.
Regardless of where you invest such returns, don’t forget that this probably won’t be the last time you’ll receive them. Stick to the plan that you come up with now so you can get the best results in the future.
This is precisely the reason why you need to match your investments against your goals. Because if you keep on receiving windfalls from investment activities without a goal in mind, chances are, you’ll end up spending your earnings.
Always remember that you’ll keep on losing the money you keep on spending. But you’ll keep on benefitting from the money you keep on investing.
