Compounding returns = exponential growth
The power of compound returns
A simple explainer with NZ fund examples
Compound returns are the reason starting early matters more than starting with a lot. The maths isn't complicated, but the effect is significant enough to be worth understanding clearly.
What compounding means
When your investments generate a return, that return gets added to your balance. In the next period, you earn a return on the original balance plus the return from the previous period. Over time, the returns start generating returns of their own.
That's compounding. It starts slowly and accelerates.
A NZ example
Two people both invest a lump sum of $10,000 in a diversified growth fund averaging 7% per year after fees.
- Person A starts at 25 and leaves it untouched until 65.
- Person B starts at 35 and leaves it untouched until 65.
Person A ends up with roughly $150,000. Person B ends up with roughly $76,000.
Same amount invested. Same fund. Same return. A ten-year difference in start date cuts the outcome nearly in half. That's compounding.
The NZ fund context
KiwiSaver growth funds have historically delivered returns in the range of 7–10% per year over long periods, though returns vary and past performance doesn't guarantee future results. Balanced funds have typically delivered 5–7%. Conservative funds sit lower.
The difference between fund types compounds too. $50,000 in a conservative fund at 4% over 20 years becomes around $110,000. The same amount in a growth fund at 8% becomes around $233,000. The fund you're in is not a minor detail.
What gets in the way
Switching to a conservative fund when markets fall is the most common compounding destroyer. It locks in losses and means you miss the recovery. Staying invested through market volatility is what allows compounding to work as it's supposed to.
Fees reduce your effective return. A 1% annual fee sounds small, but over 30 years it can reduce your final balance by 20–25%. It's worth knowing what you're paying.
How to use it with SortMe
SortMe shows your KiwiSaver balance over time. Use that alongside your contribution rate to sense-check whether your balance is growing at the rate you'd expect. If it isn't, fund type and fees are the first things to examine.
When to get advice
Fund selection, fee comparison, and understanding how your KiwiSaver fits into your broader investment picture are all areas where getting advice pays off.
These articles are financial education, not personalised financial advice. For advice specific to your situation, talk to a licensed financial adviser.