Compound Interest Guide
Can Compound Interest Work with Negative Returns?
Understand why compounding can magnify losses as well as gains when returns are negative.
Compounding is a math process
People often talk about compound interest as a positive force, but the same math can apply when returns are negative. A loss reduces the balance, and future percentage changes apply to that new balance.
This is common in investment markets, where values can rise and fall.
Sequence matters
The order of returns can affect real investment outcomes, especially when money is being added or withdrawn. A loss early in a plan can change the base for future growth.
Simple calculators often use a steady rate, so they do not show year-to-year volatility.
Use ranges for uncertainty
Because returns are uncertain, it is helpful to test lower and higher scenarios. A lower scenario can make the plan more realistic and reduce overconfidence.
The rate variance field on this calculator is designed for that purpose.