How Compounding and Averages affect your Retirement

I always learn something new from the brilliant folk at GMO, this chart speaks volumes, let me see if I can summarize it. When you have a normal distribution of returns, the average and the most likely are equal to each other.

When you introduce compounding into the equation, you can see that the most likely outcome of a $1 investment after 40 years is $3; however the average investment is $12 this is a big difference. The key factor being a -20% takes +33% to break-even.

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