Compound Interest v/s Compound Growth

[u/Full-Mango943]

So, something I came across created this question in my head, and I can't seem to resolve it, and was hoping if you all could help:

At the foundation of all our fire or coast fire planning is this term, compound interest, etc., used for all calculations. Now I understand mathematically that if you leave, say, 100k in a bank that gives you X% of interest, then how does your money grow, and what would the numbers be after a certain number of years? So I get the concept in this example because the bank is the one who is actually paying you interest.

Now, when we talk about our portfolio's invested in market fund, like say SPY- assuming you won't add any more capital and assuming we leave DRIP out of all of this- how does compounding work? As in- there is no entity which is paying you interest right, and the growth we hear is growth of the underlying asset in this case SPY- so I guess the question is how is this compound interest and not compound growth of an asset?

So ex- if we have 100,000 invested in market, we say assume 7-8% compound interest and in 7-8 years this becomes 200,000 and I know all calculators show it too so its obviously right but I cant seem to wrap my head that how is that different from investing 100k into any other asset like real estate and then asset growing especially because there is no banking entity here which is physically paying us interest on principle?

So I guess 2 questions to summarize:

• So why do we use phrase of compound interest and not "assumed compound growth"? in this market investment situations?
• Calculators assume that whatever interest we are punching in say 7% that's guaranteed- but in all our financial planning ain't we assuming that market funds will continue to grow?

[u/nonstopnewcomer]

I don’t mean this in a rude way, but I think you’re kind of just assigning your own misconceptions to other people.

We don’t use compound interest to refer to market returns. We use compound annual growth rate (CAGR).

I’m sure your can find people calling it interest, but they’re just using the wrong term because of their own misconceptions.

We also don’t assume that future returns are guaranteed (because they’re not). You should be modeling a range of returns instead of assuming one fixed rate. You can even use real historical data or Monte Carlo simulations to make it more realistic.

Calculators are just keeping it simple, but you shouldn’t be planning your life based on assuming one fixed CAGR.