Investing basics
Compounding means later gains or losses apply to a value already changed by earlier returns. Reinvested growth can build on growth, while repeated losses shrink the base available to recover.
Make it click
Imagine a snowball gaining a fixed percentage of its current size on each turn. As it grows, the same percentage adds more snow; if chunks break away, the next turn starts from a smaller ball.
Now put that into markets
Investment returns multiply through time rather than simply add. A 10% gain followed by a 10% loss leaves less than the starting amount because the loss applies after the base has grown.
Compounding depends on the sequence and frequency of returns, reinvestment, fees and tax. Geometric return captures the constant rate that would connect the starting and ending values.
Check whether a quoted rate is simple, annualised or compounded and over what period. Small recurring costs also compound because they reduce the base that remains invested.
Smooth illustrations are not forecasts. Real returns vary, negative periods matter and high assumed rates create increasingly unrealistic long-range projections.
Takeaway
