Investment Return Calculator

Compound interest is interest calculated on both the original principal and all previously accumulated interest. For investments, each period's gain is reinvested, so future gains are calculated on a larger base. The SEC explains compound interest at investor.gov: a $10,000 investment earning 7% per year doubles to roughly $19,672 after ten years without any additional contributions, purely through compounding.

Because compounding is exponential, not linear. The growth in the final years of a long investment period dwarfs the growth in the early years. An investment of $10,000 at 7% annual return grows by roughly $700 in year one but by roughly $3,400 in year twenty. This is why financial planners consistently emphasize starting as early as possible, even with small amounts.

Investment fees compound in reverse: they continuously reduce the balance on which future returns are calculated. A 1% annual expense ratio on a 7% return investment reduces the effective return to approximately 6%, which over 25 years reduces the ending balance by roughly 20%. The SEC's Office of Investor Education publishes guidance on fees at investor.gov. When comparing funds, compare total expense ratios, not just front-end loads.

Research published in academic finance literature and referenced in Vanguard studies suggests lump sum investing outperforms dollar-cost averaging in approximately two-thirds of cases in rising markets, because the full amount spends more time invested. However, DCA reduces the risk of investing everything at a market peak. If you have a lump sum ready, historical data favors investing it promptly. If receiving money gradually (such as payroll), DCA is the natural and appropriate approach.

An inflation-adjusted return strips out the effect of rising prices to show how much purchasing power your investment actually gained. If your investment returned 7% and inflation was 3%, your real return is approximately 3.88% using the Fisher equation: (1.07 / 1.03) - 1. This matters because the nominal future value of an investment may look large, but if prices have also risen substantially, the actual purchasing power may be more modest.

The SEC and CFPB both caution against assuming specific future returns, as past performance does not predict future results. Commonly cited historical averages for broad US stock market indices are in the range of 7% to 10% before inflation. For planning purposes, conservative assumptions (5% to 7% nominal) are generally preferable to avoid overestimating future wealth. Bond-heavy portfolios typically use lower assumptions.