Compound interest and dollar-cost averaging: the two ideas behind long-term investing

Compounding

Earn 10% on $1,000 and you have $1,100. Earn 10% again and it is on $1,100, not $1,000. That extra comes from growth on growth. Illustration: $10,000 at a hypothetical 7% a year becomes about $19,700 after 10 years, $38,700 after 20 and $76,100 after 30, if nothing is added or withdrawn. These are examples of the arithmetic, not predictions.

The rule of 72

Divide 72 by the annual growth rate to estimate how many years it takes to double. At 6%, about 12 years; at 9%, about 8. It works the other way too: 72 divided by inflation or fees shows how quickly they halve your buying power or erode your balance.

What counts as a good return?

Compare against inflation (the cost of living rising), against the risk you took and against a simple benchmark. Broad US stocks have returned, on average, somewhere around high single digits annually over very long periods before inflation, but that average includes years of large gains and large losses, and the future can differ. Return on investment (ROI) is (ending value − starting value) ÷ starting value, and it says nothing about how bumpy the ride was or how long it took.

Dollar-cost averaging (DCA)

DCA is investing the same amount at regular intervals, whatever the price. When prices are low you buy more units; when high, fewer. It does not guarantee profit or protect against loss, but it removes the pressure to guess the right day and builds a habit. Monthly contributions from a paycheque are DCA by default.

DCA or lump sum?

If you have a lump sum, historical data often favours investing it at once, because markets tend to rise more often than they fall. Spreading it out reduces the chance of regret if prices drop right after. Pick the one you will stick with.

Time in the market vs timing the market

A small number of the best days account for a large share of long-run gains, and they often arrive close to the worst days. Investors who step out to avoid falls risk missing the recoveries. This does not prove you should never adjust, but it explains why a plan beats a prediction.

Use calculators to explore how time, contributions and fees interact, then remember the real path will be bumpier.