It really isn't. It's true only if every year you get the promised interest rate. You don't.
This is one of my favorite charts ever: http://www.nytimes.com/interactive/2011/01/02/business/20110...
Read what it is carefully. The green and red are not that year's return, it's the cumulative return across the represented time span. Red spaces represent spans of investing for which it did not keep up with inflation.
The "compound interest" argument comes with so many caveats that in practice, it is simply false.
While this chart is really interesting and insightful, I think it makes one flawed assumption.
(Assuming I'm reading it correctly) it suggests that one would invest all of their money in one year as one big chunk, as opposed to dollar-cost averaging over multiple years, even decades. It seems like following this approach would smooth out both the best and the worst possible returns, also depending on when and how quickly you withdraw of course.
For example, at the height of a bubble when P/E ratios are crazily out of whack, taking a class that improves your quality of life or net income potential might be your best investment.
And I don't think it's a "flawed assumption". I think it's a presentation choice. Are you seriously contending that the people who made this chart thinks that anybody actually invests that way? It's a way of slicing the data. If you modeled it as putting in a fixed amount per year, that would be another way of slicing and dicing the data, not a "flawed assumption" since nobody invests that way, either. If you modeled it as people putting in fixed amounts tied to inflation, you get yet another view.
Even if you don't want to call it a flawed assumption, at best it's misleading to argue "compound interest is a myth" with the evidence of linking a chart that shows that's only true if investing in a way in which "nobody invests that way".
If you link to a chart that shows when compound interest _could_ lose, but only under conditions in which no one actually invests, then I don't consider that sufficient support to dismiss it as a "myth". Actually, if anything, it supports how true compound interest is. As long as you're willing to make the standard assumption of diversifying deposits over time to build it every year (i.e., dollar-cost averaging), which virtually every person investing does.
What this chart shows is that the idea you can get reliable six percent returns every year is utter garbage, completely contradicted by the facts, and that there are extended periods of negative returns entirely possible. If you want to rationalize a continued belief in compound interest, go nuts, but I should warn you that this irrationality is likely to cost you, in your real life, quite dearly, vs. actually engaging with the truth of the market return rate. Your choice. Doesn't much matter to me in the end.
But as you can see there isn't a single example on this chart where someone could add to their portfolio over ~50 years and entirely lose money.
> there are extended periods of negative returns entirely possible
I mean, the very worst extended period is the 20-year range from 1961-1981 where -2.0% was lost year over year. I never argued against this, just that over the long run it is smoothed out by positive returns over time.
The comments you're making are much more emotional than fact-based:
- "utter garbage"
- "rationalize a continued belief in compound interest"
- "irrationality is likely to cost you, in your real life, quite dearly"
- "actually engaging with the truth of the market return rate"
The chart itself, and the way virtually every American structures their retirement accounts doesn't reflect your interpretation.
Wow. Seems simple enough at first glance, but I would have probably fallen for that trap if I tried to math out where I might be by retirement.
That chart is neat as hell, but like sibling, I wonder what it would look like assuming you put money in each year.
Truth, that was an expensive lesson for me. First bitcoin took about $3,000 USD from me in exchange for that lesson.
Then since apparently I didn't learn it enough the first time, I sold my Facebook stock at $16..... oh what could have been... c'est la vie...
The reason you start investing early is so that you get practice investing before you have any real money to lose. All of the dumb stuff I did trying to figure out how the market works, I did when I had a couple thousand dollars. The worst I could do (since I didn't do margin) was lose a couple thousand dollars. Now if I bet wrong on my IRA, I could lose that much for a 1% drop, but I have the confidence and experience to know that 'let it ride' is the right strategy about 90% of the time. The only time I sell is when I get tired of an underperformer, or when I see clear signs of baseless exuberance (eg, an Apple media event is tomorrow) and then I buy back in when people have calmed down.