Substantive update: October 3, 2026. Clarified interest versus market returns and removed claims that compounding guarantees recovery, purchasing-power protection or investment success.
Compounding means that a later gain or loss applies to a balance already changed by earlier gains or losses. With interest-bearing savings, credited interest can itself earn interest. With stocks or funds, the relevant idea is compounded total return—not a contractual interest rate.
A fixed-rate example
Assume $10,000 earns exactly 5% a year, compounded annually, with no additions, withdrawals, fees or taxes. These are hypothetical inputs, not a quoted savings rate or market forecast.
| Time | Balance |
|---|---|
| 1 year | $10,500.00 |
| 2 years | $11,025.00 |
| 10 years | $16,288.95 |
| 20 years | $26,532.98 |
The formula is starting balance × (1 + annual rate)years. In year two, the $525 increase includes $25 earned on the first year’s $500 gain. With simple interest at 5% on the original principal only, 20 years would instead produce $20,000.
The Investor.gov compound-interest calculator lets you vary contributions, rate, time and compounding frequency. Any projection is only as meaningful as its assumptions.
Stock returns do not arrive at a steady rate
A stock or fund can gain, lose value, or make distributions. A total-return calculation includes distributions and must state whether they are reinvested. Reinvestment does not turn a risky asset into a guaranteed-income product.
Consider two hypothetical years: +20%, then −20%. Starting with $10,000 gives $12,000 after the first year and $9,600 after the second. The arithmetic average of the two percentages is zero, yet the investor lost 4%. Multiplying the growth factors—1.20 × 0.80—captures what actually happened.
Without intervening cash flows, reversing those two returns produces the same final balance. With contributions or withdrawals between them, the result can differ. For example, withdrawing $1,000 after each year leaves $7,800 for the +20% then −20% sequence, but $7,400 for −20% then +20%. The assumptions are otherwise identical. A smooth average-return chart hides that cash-flow sensitivity.
Fees and inflation change what growth means
Fees leave less money invested, which can also reduce future growth. The SEC’s fee-and-expense bulletin explains this cumulative effect. Taxes depend on the account, investment and investor; do not silently assume a projection is after tax.
A higher dollar balance is not necessarily higher purchasing power. For an illustrative year with a 5% nominal return and 3% inflation, the inflation-adjusted return is 1.05 ÷ 1.03 − 1, or about 1.94%, before taxes and fees. Compounding itself does not ensure returns exceed inflation. See Investor.gov’s explanation of investment risks.
Use projections as scenarios
Compare several return assumptions, including disappointing outcomes. Identify whether contributions happen at the beginning or end of a period, and keep inflation, costs and tax assumptions visible. Holding an investment longer does not guarantee recovery from a loss.
Explore growth and fee scenarios in our investor tools, then connect them to your goals through the portfolio-planning hub. Compounding explains arithmetic; it does not choose an appropriate investment for you.