Understanding Investment Returns
Investing is one of the most powerful tools for building wealth over time. By putting your money to work in stocks, bonds, real estate, or other assets, you can potentially earn returns that outpace inflation and grow your net worth significantly.
This calculator helps you understand how your investments can grow through the power of compound returns. Even modest regular contributions can build substantial wealth over decades thanks to compounding.
Key Investment Concepts
- •Compound Returns: Earnings generate their own earnings, creating exponential growth over time.
- •Dollar-Cost Averaging: Investing fixed amounts regularly reduces timing risk and market volatility impact.
- •Time in Market: Long-term investing smooths out volatility and allows compound growth to work.
- •Real Returns: Inflation-adjusted returns show actual purchasing power growth.
Common Investment Options
Stocks & Stock Funds
Expected Return: 8-10% annually (historical average)
Higher risk, higher potential reward. Best for long-term goals (10+ years). Index funds offer diversification at low cost.
Bonds & Bond Funds
Expected Return: 3-5% annually
Lower risk, more stable returns. Good for shorter time horizons and balancing stock volatility in your portfolio.
Real Estate
Expected Return: 8-12% annually (varies widely)
Includes rental income and appreciation. REITs offer real estate exposure without property management.
Target-Date Funds
Expected Return: 6-9% annually (varies by allocation)
Automatically adjust asset allocation as you near retirement. Great set-it-and-forget-it option for 401(k)s.
Building Your Investment Strategy
Start Early
Time is your greatest asset. A 25-year-old investing $500/month can accumulate more than a 35-year-old investing $1,000/month, thanks to compound growth.
Diversify
Don't put all eggs in one basket. Spread investments across different asset classes, sectors, and geographic regions to reduce risk.
Minimize Fees
High fees erode returns over time. Choose low-cost index funds with expense ratios under 0.20%. A 1% fee difference can cost hundreds of thousands over decades.
Maximize Tax Advantages
Use tax-advantaged accounts like 401(k)s and IRAs. Get employer match first, then max out Roth IRA, then return to 401(k).
Stay the Course
Market downturns are temporary. Avoid panic selling. Continue investing during downturns to buy stocks "on sale."
Rebalance Annually
Review your portfolio yearly. Sell winners and buy underperformers to maintain your target asset allocation.