One of the less talked about and simple tools of prudent investing is the reinvestment of dividends, or interest, for greater compounding of long-term growth. In a rising market the reinvested shares rise as the underlying assets rise. In falling market, the reinvestments occur at lower prices, thereby slightly averaging the cost of the investment downward. The same principle works in reinvesting interest income from bond funds.
This article, from the Of Dollars and Data newsletter, does a great job explaining the concept and is worth a read. Dividend reinvestment is a strategy we use routinely in managing investment portfolios. We’re happy to talk with you if you would like a better understanding of this approach.