Reinvesting the return
Compounding occurs when earlier returns remain invested and participate in later returns. Withdrawing gains breaks that same compounding path. For a constant periodic rate, ending value equals starting value times (1 + rate) raised to the number of periods. Rate and period must use the same frequency. The formula is an assumption, not evidence that an investment will earn the same amount every period.
TRY100,000: simple versus compounded
With no taxes or fees in this hypothetical example, TRY100,000 earning 2% per month becomes TRY126,824.18 after 12 periods. A simple calculation paying 2% of the initial balance each month without reinvestment totals TRY124,000. The TRY2,824.18 difference comes from earnings on earlier gains. Monthly 2% compounds to about 26.82% annually, rather than the simple 24% multiplication.
Why average returns can mislead
After a 20% rise and a 20% fall, TRY100,000 becomes TRY120,000 and then TRY96,000. The arithmetic average is zero but the cumulative result is minus 4%. Periodic return factors must be multiplied, not added. Recovering from a 20% loss requires a 25% gain. Volatility therefore has a mathematical consequence as well as an emotional one.
Deductions and contributions change the calculation
Recurring tax or fee deductions reduce the amount reinvested; a deduction only at the end can produce a different result. Monthly contributions spend different lengths of time invested and cannot all be treated as an initial deposit. Beginning-of-month and end-of-month contributions also differ. State fee timing, contribution dates and whether gains are reinvested.
Nominal growth versus purchasing power
Assuming nominal return of 30% and price growth of 25% over the same period, real return is 1.30 / 1.25 minus 1, or 4%. Subtracting percentages is only an approximation. Align inflation period, currency and cash flows. Show total contributions separately from net gains; a large ending balance does not automatically mean strong investment performance.
Sources and further reading
Numerical examples are illustrative scenarios, not company data, bank offers or current tax rates.
This content is general information and financial education. It is not personalized investment advice or a recommendation to buy or sell.