In the past we’ve talked about compound interest, which happens when your interest adds up the longer you keep it in a deposit. The same logic can apply for other kinds of investments. How? By reinvesting.
Reinvesting with bonds
Let’s look at how to reinvest with bonds first. Let’s say you invested P50,000 in a 3-year corporate bond that gives 5% coupon payments twice a year. (For simplicity, let’s disregard taxes and the corporation is able to pay you everything). That means you get P2,500 every 6 months for 3 years. At the end of the 3 years, you get back the P50,000.
When you get your interest payments with bonds, the money’s already yours. What if you invest it in something else? P2,500 might seem small but it’s actually enough to use to top up some unit investment trust funds (UITF) and mutual funds.
This way, when the bond matures, not only do you get your P50,000 back, each batch of P2,500 you reinvested will have had the chance to grow.
Reinvesting with stocks
The simplest way to reinvest with stocks is through dividends. Dividends are when the corporation shares profits with stockholders. Just note that not all corporations do this and the amount you get won’t be consistent. Regardless, when you get dividends, it’s an opportunity for you to reinvest.
Reinvestment risk
As with anything you do in investing, there is risk. Reinvestment risk is when you try to reinvest but you don’t have many good options to look for. That is why some people prefer long-term investments. However, there is also the risk that you may find a better investment but have your money tied up in a long-term investment.
