1. What is the Compound Return Formula?

The compound return formula calculates how an investment grows over time when earnings are reinvested. It's fundamental for understanding long-term investment growth in index funds.

2. How Does the Calculator Work?

The calculator uses the compound return formula:

Where:

• \( Initial \) — Starting investment amount ($)
• \( Rate \) — Annual rate of return (as percentage)
• \( Time \) — Investment period in years

Explanation: The formula accounts for exponential growth where each year's returns generate their own returns in subsequent years.

3. Importance of Return Calculation

Details: Understanding compound returns helps investors make informed decisions about long-term investments and retirement planning.

4. Using the Calculator

Tips: Enter initial investment in dollars, annual return rate as percentage (e.g., 7 for 7%), and investment period in years.

5. Frequently Asked Questions (FAQ)

Q1: What's a realistic return rate for index funds?
A: Historically, global index funds average 6-8% annual return over long periods, but past performance doesn't guarantee future results.

Q2: How does compounding frequency affect results?
A: This calculator assumes annual compounding. More frequent compounding would slightly increase returns.

Q3: Should I include inflation?
A: For real (inflation-adjusted) returns, reduce the rate by expected inflation (typically 2-3%).

Q4: What about taxes and fees?
A: For more accurate results, account for taxes and expense ratios by reducing the rate accordingly.

Q5: Can I use this for other investments?
A: Yes, this formula works for any investment with compound growth, though rates will vary.