Compound interest is presented everywhere as the "eighth wonder of the world". The formula is exact — but incomplete. Compounding is a neutral mechanism: it amplifies anything that repeats as a percentage, in both directions. It works for you when growth is what compounds; against you when fees or borrowing costs are.
The mechanism
To compound is to earn (or pay) a percentage on an amount that already includes the previous percentages. Year after year, the base grows, so each percentage weighs more than the one before. Growth is not a straight line: it curves — gently at first, then faster and faster.
A neutral worked example
A fictional investment of $10,000, at a hypothetical return of 6% per year:
- After 1 year: $10,600 — the year's gain is $600.
- After 10 years: about $17,900.
- After 20 years: about $32,100 — the gain of the 20th year is about $1,815: three times that of the first, with no change in the rate. It is the base that grew, not the percentage.
The same mechanism, against you
Anything taken as a recurring percentage compounds exactly the same way:
- management fees: an annual MER compounds over decades — the article on the MER puts a number on the gap: about $9,000 lost over 20 years between two funds with identical gross returns, from the fee difference alone;
- margin interest: borrowing to invest means carrying a rate that runs and compounds against you, whether the investments rise or fall — the article on the margin account describes the full mechanics;
- even a small recurring deduction, trivial in any given year, becomes substantial through compounding — the exact mirror of the "small return that ends up mattering".
The structural consequence: time is the heavy variable
In the compounding formula, duration is the exponent: it is what curves the path. That is an arithmetic fact, not advice — it simply explains why gaps, in returns as in fees, look insignificant at one year and considerable at twenty.
What this changes for your tracking
Prices are not yet shown in the app; they will be at launch.
The total gain Everyfolio shows is the cumulative result of this compounding on your positions — gains on gains, since your transactions. The forces compounding against you, meanwhile, are largely invisible in a tracker: a fund's fees are already deducted from the unit price (see the article on the MER), and margin interest lives on the broker's statement. Knowing about them is knowing what the figure on screen has already been through.
Informative, general content — not personalized advice. For your situation: your institution or an advisor.