The Right Way to Combine Stock Trading With Compound Interest

When you look at investors who trade stocks for a living, you will find that quite a few of them keep their capital funds in compound interest accounts, but this does not necessarily mean that they manage compounding portfolios. Most retail stock brokerages offer clients the option to keep their funds in interest-bearing accounts when they are not tied up in a market position, and the option to receive compound interest is usually offered.

Adding Stocks to Compound Interest Portfolios

When we think about the relation between compound interest and stock investing, we usually think about the Warren Buffett strategy of selecting shares of companies that not only pay dividends but also have substantial growth potential. You hope that these stocks will appreciate over time through expansion, mergers, and perhaps stock splits; at the same time, you can reinvest dividend profits for the purpose of accumulating more shares.

Many compound interest investors focus on just one or two financial instruments when putting together their portfolios; they may choose a high-yield savings account or a single stock. There is nothing wrong with this approach, at least not until the stock takes a dive and fails to recover. We all want to pick the next Apple, Google, or Tesla, but there is no guarantee that we will find such golden chalice stock.

Follow the Right Advice about Stock Trading

The best way to handle stock trading as a compound interest investor is to follow the advice of mutual fund managers who insist on diversifying their portfolios. On Wall Street, putting all your eggs in one basket is the epitome of taking unnecessary risks. If you have enough funds to acquire shares of various companies that meet your growth potential criteria, this is what you should do.

do not be in a situation where a single stock drags you down

Getting back to Mr. Buffett, his Berkshire Hathaway holding company invests in dozens of stocks across many sectors. The Berkshire portfolio does have a compound interest feature, and the goal of its fund managers is to always keep it at its highest level. You should think of your portfolio as the single asset that needs to be as efficient and profitable as possible, but you do not want to be in a situation whereby a single stock drags down your investment capital.

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