‘Compounding at a Whopping 5%’: Adviser Warns the 11% on Your Statement Is Not What You Keep

David Fagan starts with a broker statement that shows an 11% annual return over 10 years. Then he takes that number apart. “I mean, you could be grinding pretty hard to have your capital compounding at a whopping 5%,” the Canadian CPA said on The Investor’s Podcast/We Study Billionaires.

The gap compounds quickly. Invest $100,000 for 30 years at 11% and you end with about $2.29 million.

At 5%, you end with about $432,000. If your retirement plan assumes the first number and you actually earn the second, you’re short roughly $1.86 million.

What the Market Paid Versus What Investors Kept

The market held up its end of the deal. Over the past decade, the SPDR S&P 500 ETF (NYSEARCA:SPY) rose 254%. That works out to about 13% a year. That figure includes price only. SPY also pays quarterly dividends, which boosts the total return. Top holdings include the likes of Nvidia (Nasdaq: NVDA | NVDA Price Prediction), Apple (Nasdaq: AAPL) and Microsoft (Nasdaq: MSFT).

Fagan is right, and his math is conservative. A statement return shows how invested dollars did while they were invested. Your wealth depends on everything around that. He explains it with an analogy: “When someone asks how your flight was, you don’t just describe the plane…you also want to make sure that you make it to the airport on time and that your luggage arrived.”

Idle Cash That Missed the Flight

The first loss happens before your money is invested. Fagan asks: “Was money sitting idle for part of the year every year before it got invested? Were you trying to time the market?” Most statements report a time-weighted return. That method measures the portfolio and leaves out cash you never put to work. Money held back while you wait for a dip earns cash rates, and the statement never shows it.

Fees and Bonds Add Friction to the Engine

The second loss is the cost of the portfolio itself. Advisory fees come off every year, and so does the drag from a bond allocation that earns less than stocks. SPY’s expense ratio is about 0.09%. An example 1% advisory fee on top of that takes roughly 10 times as much each year, and it compounds against you the entire time.

Taxes Make Your Luggage Disappear

Selling triggers the last loss. Short-term gains are taxed as ordinary income, and the 2025 federal brackets go from 10% to 37%.

Fagan says behavior mistakes plus tax drag alone can turn 10 or 11% into a 7 or 8% return.

Here’s what that does over the same period. At 8%, $100,000 grows to about $1.01 million, less than half of what 11% produces.

Add fees and bonds to get to 5%, and you have the $432,000 result.

Where Your Money Sits Decides the Biggest Leak

The tax loss depends on the type of account. Fagan points out that Canadians use registered accounts called RSPs and TFSA, where money grows without yearly tax. In the U.S., the matching accounts are the 401(k), the traditional IRA, and the Roth IRA. “For taxable investors, the ones that have to pay tax on their decisions, you have to consider tax drag,” he said.

Take the same 11% portfolio and assume, as an example, 2 percentage points of yearly tax drag in a taxable account.

After 30 years, $100,000 grows to about $1.33 million instead of $2.29 million.

That’s about $962,000 lost to taxes alone. Traditional accounts still tax your withdrawals. Even so, untaxed growth along the way keeps far more money compounding.

Five Ways to Measure Your Own Leaks

1. Look up your personal rate of return. Many brokers show a money-weighted return next to the time-weighted one. If the money-weighted figure is lower, idle cash or poorly timed deposits are costing you.
2. Check your average cash balance. Look at how much cash sat uninvested over the past year. Any amount that stays put for months is part of the front-end loss.
3. Add up your total fees. Combine each fund’s expense ratio with any advisory fee. Then compare that total to a low-cost index fund like SPY.
4. Total the taxes you paid. Pull realized gains and dividends from your 1099 forms and add up the tax on them. Divide that by your account balance to see your yearly tax drag.
5. Plan with what you keep. Put your net return, after fees and taxes, into your retirement calculator instead of the statement figure. Fill tax-advantaged accounts first, and put tax-inefficient holdings like bonds inside them.

Your statement shows how the portfolio performed, and your net worth shows what you kept, so close the gap between the two before you plan around it.

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