The Infinite Compounding Fallacy

The financial planning profession has a long history of demonstrating the power of compounded growth to clients.  Typically, a chart will be shown that shows the difference between investing $100 per month at 1%, 5%, 8%, and 10% rates of return for 20, 30, and 40 years.  As expected, the results are typically astounding.  The extended impact of compounding for a longer period of time at a higher rate of return creates a tremendous difference in the amount of compounded returns after a long period of time.  Thus, the fundamental assumption behind all contemporary financial planning models is to invest money into financial products that have historically compounded at a high rate.  This is supposed to enable you to enjoy a happy and comfortable retirement from your compounded returns.

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