In finance theory, expected returns presume a closed universe of compound growth where the income received on assets is continually reinvested without any fees, withdrawals, taxes or principal losses to reduce net gains. In reality, all of these are regularly recurring facts of life for most.

As I explain (ad nauseum?) money is like a snowball. To keep it growing, we need to roll very carefully. When we roll carelessly or too quickly, we are at high risk of breaking off big chunks that not only wipe out years of previous progress but then require time and effort to rebuild what we had in the beginning. In the process, full-cycle compound returns can easily morph into compound losses that undermine financial hopes and dreams.

After a decade working to grow back their 2007-09 losses, would-be investors are due for their next capital reset.Once the next bear market has run its course, it’s quite likely most will have netted zero or even negative investment gains since the late 1990s. Believe it or not. This is typical of how secular bear markets (that start from periods of extreme asset overvaluation) move.

Those holding corporate securities today are picking up pennies in front of an oncoming steamroller. The unprecedented advent of negative yields makes the math even more dangerous. See more in Negative is the new subprime:

Compounding wealth is the most important and most difficult financial concept for investors to grasp. Over the last ten years, many investors spent significant time recouping losses from the financial crisis, and they assumed great risk in doing so. Having recovered some or all of those losses, many are back in a position of compounding wealth. At this point, they can continue to look backward and believe that irrational policies will ensure that the past is prologue, or they can exercise some independent thought and recognize that the risk of another serious drawdown is not negligible. Prudent risk management is very generous to those who elect patience over expedience. Most financial advisors will not volunteer a fee-reducing, conservative approach even though it would be in their own best interest to do so at critical times.