The internet is full of investment strategies promising 20%, 50%, even 100% annual returns. Crypto moon-shots, leveraged options plays, meme stocks. Some of them even work — for a while. But here is the uncomfortable truth that every experienced investor eventually learns: getting rich is not about high returns. It is about surviving long enough for compounding to do its work.
In this article, we run the math on "reasonable" versus "exciting" returns and show why the boring path almost always wins.
The Math: 7% Steady vs 20% Then Crash
Imagine two investors, each starting with $100,000. Investor A earns a steady 7% per year for 30 years. Investor B earns a thrilling 20% per year for 5 years — then gets hit by a 50% crash (the kind that happens roughly once a decade in equity markets). After the crash, Investor B recovers and earns 7% for the remaining 24 years.
Path A — The Steady 7%
$100,000 × (1.07)30
= $100,000 × 7.612
= $761,226
No interruptions. No panics. Just 30 years of patience.
Path B — The Exciting 20% (Then Reality)
$100,000 × (1.20)5 = $248,832 (feeling great!)
$248,832 × 0.50 = $124,416 (crash year 6)
$124,416 × (1.07)24 = $124,416 × 5.072
= $631,053
Even with 24 years of recovery at 7%, the crash cost more than a decade of outperformance.
$761k
Steady 7% for 30 years
$631k
20% for 5 yrs + crash + recovery
$130k
The cost of one crash
Investor A ends up with $130,000 more — despite never once having an "exciting" year. The single crash wiped out all five years of spectacular outperformance and then some.
Visualizing the Two Paths
The chart below shows both trajectories side by side. Notice how Investor B shoots ahead early (the dashed red line), then plummets at year 6 and spends the next two decades trying to catch up — and never does.
Compounding Needs Time. Time Requires Survival.
Albert Einstein may or may not have called compound interest the "eighth wonder of the world," but the math behind it is genuinely remarkable. The key insight is that compounding is exponential — most of the growth happens in the later years.
$100,000 Growing at Different Steady Rates
At 7%, your $100,000 barely doubles in the first 10 years. But between year 20 and year 30, it grows by more than $350,000. The magic is in the last decade — but only if you are still in the game.
The Compounding Chain
The Reality of Market Crashes
The S&P 500 has delivered roughly 10% annualized returns before inflation over the past century — arguably the greatest wealth-building machine in history. But that average hides brutal drawdowns:
S&P 500 Historical Drawdowns
| Period | Event | Drawdown | Recovery |
|---|---|---|---|
| 1929–1932 | Great Depression | -86% | ~25 years |
| 1973–1974 | Oil Crisis / Stagflation | -48% | ~7 years |
| 2000–2002 | Dot-com Bust | -49% | ~7 years |
| 2007–2009 | Global Financial Crisis | -57% | ~5 years |
| 2020 | COVID-19 Crash | -34% | 6 months |
| 2022 | Rate Hike Sell-off | -25% | ~2 years |
These are not hypothetical scenarios — they are recent history. The 2008 crash cut portfolios in half. The dot-com bust took seven years to recover from. And the Great Depression? A quarter century.
The investors who built lasting wealth were not the ones who earned the highest returns in any single year. They were the ones who stayed invested through the crashes because their risk level was survivable.
Risk-Adjusted Return: What Actually Matters
Wall Street professionals do not just ask "what was the return?" They ask "what was the return per unit of risk?" This is called the risk-adjusted return, and it is arguably the most important concept most retail investors have never heard of.
Here is the simplest way to think about it:
Investment A: 8% return, max drawdown -15%
You sleep well at night. You never panic sell. You stay invested for 30 years. Your $100k becomes $1,006,000.
Investment B: 15% return, max drawdown -60%
Thrilling in bull markets. But when the -60% crash hits in year 8, you panic sell at the bottom (like most people do). Your $100k at that point? $131,000 — after 8 years.
On paper, Investment B is "better." In reality, almost nobody holds through a 60% drawdown. The theoretical return is meaningless if human psychology makes it unachievable. The best return is the one you can actually stick with.
The Sharpe Ratio — In Plain English
Professionals use the Sharpe Ratio to measure risk-adjusted return. The formula is simple:
Sharpe = (Return − Risk-Free Rate) ÷ Volatility
A higher Sharpe Ratio means you are getting more return per unit of risk. An S&P 500 index fund typically has a Sharpe Ratio around 0.4–0.5. Anything above 1.0 is excellent. Most "exciting" strategies that promise 20%+ returns have Sharpe Ratios below 0.3 — meaning you are taking on enormous risk for each percentage point of return.
Interactive: Steady vs Crash Calculator
Adjust the parameters below to model your own scenario. Change the starting amount, the steady rate, the "exciting" rate, when the crash hits, and how big it is. See for yourself how hard it is for exciting returns to beat boring ones over a full investing lifetime.
Steady Investor
WINS$761,226
7%/yr for 30 years, no crash
+$661,226 gain
High-Risk Investor
$631,084
20%/yr for 5yrs → -50% crash → 7%/yr after
+$531,084 gain
The Reasonable Investor's Playbook
None of this means you should avoid stocks or accept savings-account returns. It means you should build a portfolio that you can live with through the inevitable downturns. Here is what that looks like:
- Target 7–10% long-term returns — This is what a diversified portfolio of index funds has historically delivered. It is not flashy, but it is real.
- Accept that drawdowns will happen — Budget for a 30–50% crash every 7–10 years. It is not a question of if, but when.
- Size your risk to your sleep threshold — If a 40% drop would make you sell, you have too much in stocks. Reduce until the worst-case scenario is something you can sit through.
- Rebalance, do not panic — When markets crash, rebalance back to your target allocation. You are buying low by design.
- Remember the endgame — The goal is not to have the best return this year. It is to be wealthy in 20–30 years. That requires being in the game the entire time.
The Bottom Line
A 7% return compounded over 30 years turns $100,000 into $761,000. That is not exciting — it is extraordinary. The investors who achieve it are not the ones chasing the highest returns. They are the ones who controlled their risk, managed their emotions, and simply stayed invested.
In investing, as in life, the tortoise beats the hare. Not because it is faster, but because it never stops moving.