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Track 04 · Risk & Portfolio Building

Compounding and time in the market

Why time beat timing in almost every historical dataset, and how to make consistency automatic.

2 min readBeginnerLesson 14 of 18
Rule of 72 at 7% a year: three doublings (illustrative)

Time does most of the work. The effect is back-loaded — most of the gain arrives in the later decades.

  1. Year 0$10,000The starting lump, with no further deposits.
  2. Year 10$20,000First doubling: 72 ÷ 7 ≈ 10 years.
  3. Year 20$40,000The second doubling adds twice what the first did.
  4. Year 30$76,000Most of the money was made in the last decade.

Illustrative arithmetic at a constant 7% — real returns vary, include losing years, and past performance never guarantees future results.

How compounding works

Returns earn returns. At 7% a year, money doubles roughly every ten years. The rule of 72 (divide 72 by the rate) gives you the doubling time in seconds.

The effect is back-loaded: most of the gain arrives in the later decades, which is why starting early beats starting large.

  • Rule of 72: 72 ÷ annual return ≈ years to double.
  • At 7%, $10,000 becomes about $76,000 in 30 years without a single new deposit.
  • Add $300 a month and the same period approaches $370,000: contributions plus compounding.

Time versus timing

Missing the handful of best days, which cluster in the worst weeks, is what kills market-timing returns, and those days are unknowable in advance.

Staying invested through the volatility described in the risk track is the practical way to be present for them.

Make consistency automatic

Scheduled contributions remove the decision of when to act, and rebalancing forces the discipline of trimming what ran and adding to what lagged.

Automating both turns compounding from a concept into a default behaviour, the only version that survives a bad year.

Three things to remember

  1. 01Compounding is exponential: time in the market beats the perfect entry.
  2. 02Missing the best days means missing the recovery that contains them.
  3. 03Automate contributions and rebalancing so discipline does not depend on mood.

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