Final answer:
The performance of investment portfolios on E-Trade is likely better for the investor who actively manages their investments as opposed to one who chooses companies randomly and ignores the market. Diligent tracking and informed decisions can improve returns, especially when combined with the benefits of compound interest over time. Starting early with a strategic approach can lead to significant portfolio growth.
Step-by-step explanation:
When it comes to monitoring and choosing investments on platforms like E-Trade, the approach taken can significantly impact the performance of investment portfolios. An investor who is diligent in tracking their selections, prices, and relevant current events, known as active management, typically has a better grasp of the risks and opportunities within their portfolio. This can result in more informed decision-making, potential timely adjustments to the portfolio, and possibly improved performance over someone who selects companies randomly and ignores the financial market.
Conversely, the friend who chooses companies randomly and pays no attention to financial updates engages in a more passive investment strategy. This approach might occasionally yield positive results due to market uptrends or random success in selecting 'winning' stocks. However, it can also lead to significant missed opportunities or losses if the market takes a downturn and necessary adjustments to the portfolio are not made.
To illustrate the power of strategic investing and compound interest, consider saving $3,000 at an annual rate of return of 7% above the rate of inflation. This disciplined approach to investing can result in significant growth using the compound interest formula: after 40 years, a $3,000 investment can grow to nearly $44,923, showcasing the importance of well-informed, diligent investing and starting early.