Investment Calculators

Compound growth, what fees really cost, the return you actually received, and why the order of good and bad years matters enormously once you are drawing an income — and not at all before.

Why a 0.9% charge costs far more than 0.9%

The intuition is that a 1% annual fee costs about 1% of what you end up with. Over a working life it costs a fifth of it, or more.

The reason is that the fee compounds against you exactly as returns compound for you. Every pound taken in year three is not just a pound — it is also everything that pound would have earned over the following thirty years. Charging on the balance rather than on the return makes it worse still: the fee is levied whether the year was good or bad.

This is the single largest thing an ordinary investor controls. Nobody can choose next year’s return; anybody can choose between a fund charging 0.9% and one charging 0.05%.

The average return nobody receives

Almost every published “average annual return” is the arithmetic mean of the yearly figures. It is not what any investor got.

A fund that rises 50% and then falls 50% has an average annual return of exactly zero, and has lost a quarter of your money. What you receive is the geometric mean, which is always lower, and the gap widens with volatility. That is why a wildly volatile fund can advertise a higher average than a steady one while leaving its holders with less.

The order of returns, and when it matters

While you are only contributing, the order of good and bad years makes no difference at all to where you end up. Multiplication does not care about order — the same returns in any sequence produce the same multiple.

Once you are taking money out, the order matters enormously. A bad first year sells units at a low price to fund that year’s income, and those units are never bought back; the recovery, when it comes, happens on a smaller holding. Two retirees with identical average returns over identical periods can end up in entirely different positions depending only on which years came first.

This is why the drawing-an-income calculation takes a sequence rather than an average, and shows you the same years reversed. It is also why the withdrawal is taken at the start of each year, before that year’s return: you spend in January rather than waiting to see how the year goes, and modelling it the other way flatters every result.

What the index number leaves out

The figure quoted in the news when an index moves is almost always the price index, which excludes dividends. Over a year the difference is a couple of per cent. Over thirty years, with dividends reinvested, it can be a third or more of the total return.

What none of this can do

Everything is calculated in your browser. Balances, contributions and assumptions are not uploaded, and nothing is stored.