Reinvest profits

Also seen as: Reinvest, compounding, profit compounding. Not to be confused with Reinvest delay, a separate screening-strategy setting that waits a number of months before freed-up cash goes back to work.

What changes when reinvest profits is off?

With the assumption off, profit taken out of a closed position no longer increases the capital the strategy deploys on the next rebalance. Position sizes keep being computed from a base that does not grow with past wins, so profit accumulates beside the strategy instead of inside it — growth is additive rather than compounding, and a long run ends visibly lower than the same run with the assumption on.

With it on, each realized profit raises the capital at work, so later positions are sized off a larger base. That is compounding, and it is the reason the gap between the two views widens the longer the run.

Which annualized-return metric does it drive?

This assumption also decides which annualized-return figure the metrics table shows, because only one of the two is meaningful for each case:

• On → CAGR, the geometric annual growth rate — the right measure when profits compound.
• Off → AAGR, the arithmetic average of the annual returns — the right measure when they do not.

The row swaps in place, so a figure you read as "the annualized return" can be either metric depending on this one switch. Check which of the two labels the row is carrying before comparing two strategies.

Defaults in Fincanva

• Reinvest profits is on by default — the one assumption of the three that starts switched on, so results compound out of the box.
• Flipping it switches the displayed result immediately, with no new run (see simulation assumptions).
• It applies to realized profit; unrealized gains on open positions are unaffected either way.
• Cash the strategy is not holding in positions accrues interest in the simulation on its own terms, independently of this assumption — see interest received and paid.
• It is independent of the costs and taxes assumptions, so any combination of the three can be viewed.

Worked example

Take 10,000 of starting capital and, purely to isolate the mechanic, a flat 8% a year for 10 years.

• Reinvest profits on — each year's 8% is earned on a base that already includes previous years' profit: 10,000 × 1.08¹⁰ ≈ 21,589.
• Reinvest profits off — each year's profit is 8% of the original 10,000, i.e. 800, set aside ten times: 8,000 of profit on top of the untouched 10,000 = 18,000.

Same strategy, same yearly return, a gap of about 3,589 that comes only from whether profit was put back to work. The gap grows with the length of the run: it is small over two years and large over twenty.

A flat yearly return is an arithmetic illustration of compounding, not something a real backtest produces, and not a projection of any strategy's returns. Fincanva provides no financial advice — see Is this financial advice?.