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The Missing Money: When is a 7 percent return not a 7 percent return? Answer: Most of the time
Let’s say you make a $100,000 investment in stocks that compounds at 7 percent per year (which is not far from what U.S. equities have historically returned), and you hold onto that portfolio for 25 years without adding or withdrawing funds. For the sake of argument, let’s assume the return is constant, never deviating from 7 percent per year. A constant 7 percent line scenario demonstrates that, at the end of a quarter-century holding period, the value of that $100,000 sum would have more than quintupled to $542,700. For most investors, this would be a very satisfying outcome.
The catch, of course, is that the assumptions we have made above are unrealistic. Aside from certain cash equivalents, no investment will grow at exactly the same rate every year, and the riskier the asset (e.g., stocks), the greater the volatility. To simulate the real world, we ran five randomized trials, all with an “average return” of 7 percent a year, but now adding the