How compounding interest works

First, invest in quality, growth stocks that you have conviction to hold long-term. Diversification comes later on

Hi Anon,

I think the answer is both yes and no. Let's say you have a principal amount of $10k. If you invest in an ETF that returns 10% every year for 10 years, you end up with about $25,937 after 10 years. If you split that $10k up into 5 investments of $2k each, and if they can each earn 10% every year for 10 years also, you will end up with the same amount of money after 10 years. So spreading out your investment doesn't actually hurt your returns by means of a smaller principal.

But the issue is that if you diversify your investments, it's unlikely that you'll be able to find several different investments that can produce the same average returns compared to a fewer number of investments. Say you're deciding between S&P 500 only or S&P 500 + China + SG. If China and SG produce lower returns than the S&P 500, then yes, diversifying in this sense will cause your compounding effect to be smaller because your overall return is lower than if you had only invested in S&P 500.

Personally, I think when your portfolio is still small, it makes very little sense to diversify too much. 1 - 3 good ETFs is probably all you need - simple but effective.

Hope this helps & all the best!

Regards,

thefrugalstudent