In short: Compound return, commonly called compounding, means earning returns on previously accumulated returns. When investing in stocks and ETFs, earlier capital gains and reinvested dividends generate additional earnings in subsequent periods. Over longer investment horizons, this cumulative process steadily accelerates portfolio growth without requiring higher contributions.
How compounding works in equity investing
In everyday conversations, compounding is frequently associated with fixed savings rates. When investing in exchange-traded funds, however, compounding is driven by market returns: shifting share prices and reinvested dividends rather than fixed bank interest. Real market returns go up and down and can be negative in any given year.
When markets rise and dividends are put back to work, the capital base on which future percentage returns are calculated expands continuously. Compounding simply means your past gains continue working alongside your new contributions.
Monthly compounding in the calculator
The Stazora calculator computes growth on a monthly schedule. It starts from an annual gross return before costs and converts it into a monthly rate. In our default baseline scenario, assuming an annual gross return of 6% and ongoing fund costs (TER) of 0.14% (matching VWCE), the net monthly rate is (6% − 0.14%) ÷ 12 = 0.48833% per month. Without fund costs, the monthly rate is exactly 0.5%.
Each month, the portfolio balance is multiplied by 1 plus the monthly rate, and the new monthly deposit is credited at the end of the month. In financial mathematics, this ordinary annuity is expressed by the formula:
FV = PMT × ((1 + i)^n − 1) ÷ i
The 6% annual return is an illustrative assumption, not a forecast; actual investment results vary over time.
An example: €100 a month over 40 years
This table demonstrates how a regular monthly contribution of €100 deposited at the end of each month evolves from €0, calculated at 6% annual return before costs with ongoing fund costs of 0.14%. This baseline excludes taxes, transaction costs, and inflation.
| Horizon | Deposited | Without costs | After 0.14% costs | Costs in total |
|---|---|---|---|---|
| 10 years | €12,000 | €16,388 | €16,264 | €124 |
| 20 years | €24,000 | €46,204 | €45,445 | €759 |
| 30 years | €36,000 | €100,452 | €97,803 | €2,649 |
| 40 years | €48,000 | €199,149 | €191,745 | €7,405 |
Investing involves risk of loss. The figures presented by this calculator are for illustrative purposes only and do not constitute financial advice. Past performance does not guarantee future results.
Why the first years look slow
In year 1, your deposits total €1,200, and the first-year return on that capital is roughly €33. This initial progress feels small because the vast majority of your portfolio still consists of your own deposited euros. Over an extended investment horizon, the compounding curve bends sharply upward.
Doubling the time horizon from 20 to 40 years doubles your cumulative deposits from €24,000 to €48,000. However, your net balance becomes about 4.2 times as large, surging from €45,445 to €191,745. At that maturity, approximately three-quarters of the entire portfolio consists of accumulated investment return.
Costs compound too: fee erosion
Just as returns build on past returns, money deducted for fund fees stops compounding in your account, an effect called fee erosion. Over 40 years in this example, ongoing costs of 0.14% claim €7,405 in total. That represents 4.9% of the entire gross investment gain (€151,149, which is €199,149 gross minus €48,000 deposited). The difference between gross and net return is what you keep.
This is general information, not tax or investment advice. For your own situation, consult a qualified tax adviser, a financial adviser licensed by the AFM (the Dutch financial markets authority) or the Belastingdienst.
Frequently asked questions
What is the formula for compound return?
For regular monthly investing, the standard future value formula is: FV = PMT × ((1 + i)^n − 1) ÷ i, where PMT is the monthly contribution, i is the monthly return rate, and n is the total number of months.
Why does compounding take time to show results?
In early years, personal contributions represent nearly all of the total portfolio value. As accumulated returns begin generating their own returns over time, the growth from investment gains can overtake the yearly contributions.
How do you calculate compound return in a spreadsheet?
In spreadsheet software such as Excel or Google Sheets, use the FV function: =FV(rate, nper, -pmt, -pv, 0), entering the monthly rate and total number of months.
Does compound return apply to stock and ETF investing?
Yes. When dividends are reinvested and share prices rise over long periods, gains compound continuously, although unlike savings accounts, equity markets fluctuate and involve investment risk.
Related pages and terms
- Compounding calculator: interactive calculator for lump sums and monthly investing
- Compound growth: how a fixed monthly amount grows: full educational walkthrough
- How the ETF Calculator works: mathematical principles and assumptions
- ETF Calculator: simulate fund costs and fee erosion over your horizon
- Glossary: Compound return: definition in the Stazora glossary
- Glossary: Regular investing: periodic investing principles
- Glossary: Fee erosion: how fees erode compound returns
Open this calculation directly in the calculator and adjust the horizon, deposits, or return to model your own situation.
Sources
- Stazora ETF calculation engine, checked against standard annuity formulas (see how the calculator works).
- Actuarial mathematics literature on future value of ordinary annuities compounded monthly.
- European supervisory guidelines on realistic long-term investment illustrations (AFM and ESMA guidance).