Are compound growth and average annual return the same?
A simple average can hide what actually happens to your money.
Compounding means reinvesting earlier gains
KRW 1 million growing at 10% annually becomes KRW 1.1 million after one year and KRW 1.21 million after two. The second year earns a return on the first year's gain too. This assumes a constant yearly return and reinvestment.
The average of +20% and −20% is zero, but…
If KRW 1 million rises 20% to KRW 1.2 million, then falls 20%, it ends at KRW 960,000. The arithmetic average return is zero, but the cumulative return is −4%, because each percentage applies to a different balance.
CAGR = (ending balance ÷ initial balance)^(1 ÷ years) − 1
In this example, CAGR is √0.96 − 1, about −2.02%. It is the constant annual rate that would produce the same ending balance, not the actual return in each year.
Contribution timing matters too
A lump-sum investment and regular monthly investing respond differently to price changes. Buying more after prices fall buys more shares, but existing losses and any future recovery are separate issues. CAGR based only on opening and closing balances is not directly suitable for accounts with many deposits and withdrawals.
What should you enter in the compound calculator?
Future returns are unknown, so compare scenarios instead of treating one rate as the answer. Try 0%, 3% and 7% annually with identical contributions. Before reducing savings based on a high return assumption, see whether your goal works at a lower rate. These are illustrative assumptions, not expected returns for any asset.
Nominal returns and purchasing power differ
If an annual return is 7% and inflation is 3%, the real return is 1.07 ÷ 1.03 − 1, about 3.88%, rather than exactly 4%. The compound calculator shows nominal balances before inflation. Taxes and costs further change what you can spend.
Hold other inputs constant when comparing results
To isolate time, keep initial investment, contributions and return unchanged and vary only the horizon. To isolate saving, vary only monthly contributions. Changing the rate period from annual to monthly preserves the number 7; annual 7% and monthly 7% are very different assumptions.