How Compound Growth Works

Compounding means returns are earned on prior returns as well as on the original capital. Over long horizons this produces a curve rather than a straight line.

Two variables dominate the outcome: the rate of return and the number of periods it is left uninterrupted. Withdrawals, fees and taxes each shorten the effective compounding runway.

Compounding works in both directions. A sequence of losses compounds too, which is why volatility management matters as much as raw return.