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Compound Return
Mutual Fund Bullet Tour Page 12Compound Return - Compound return is what causes investments to grow exponentially, i.e., the value of your investment will increase at an increasing rate in the long run.
- The power of compounding is so strong that Albert Einstein once said "The most powerful force in the universe is compound interest."
- The basic compound return formula is (1 + r)n, where r is the periodic rate of return and n is the number of compounding periods. This is the basis for all time value of money (TVM) calculations.
- TVM functions are built into all financial and business calculators. Do yourself a favor and buy one and learn how to use the TVM functions. Doing so will teach you the basics of the time value of money. (Basic financial calculators cost about $30.)
Note that both of the curves are upward-sweeping. However, the curve constructed from the actual monthly returns portrays the fact that investing returns are by no means consistent. A portfolio that had been diversified well beyond the S&P 500 would have delivered much more consistent returns than one consisting solely of the S&P 500 index.Relevant Content:
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