At What Level Does a Portfolio Take Off?

[ResNullius]

I'm retired now, but I always maxed tax-deferred, paid down the mortgage as quickly as possible, tolerated no other debt, and invested additional money into a taxable account. Along the way, I watched with great interest whenever I crossed a milestone, which for me was every $100K. I also watched with even greater interest whenever I got close to and later crossed the bigger milestone of $1M, then the next million, and so on. There sometimes when many years would pass with little or no overall increase due to a dropping market, while other years would pass with huge overall increases due to hyper growth. The 90s were such a time, and fortunately I had already accumulated a nice amount by that time, so the milestones passed at a fast pace during that decade. Of course, then there were the reverse milestones like the bust of 2000, then the 9-11 bust, then the 2008-2009 bust. The good news is that staying the course, at least up until now, has paid off quite well. My friends who jumped in and out of the market, sold in down markets, and bought at the top of the market are still sucking wind. I don't know what the future holds, but my guess is that the future will bring far more difficulty than any time during the past 100 or more years, so good luck to us all.

[ofcmetz]

So the answer comes down to some variant of the following:

+ When I stopped seeing the portfolio as a hypothetical value to an actual value
+ When I became proud of it
+ When I came to actually believe that I might be able to live comfortably off of it
+ When it hit a large round number
+ When the annual returns in absolute terms gobsmacked me
.

Here's to be gobsmacked by annual returns.

To answer the OP, I think I may feel that way when the income from my bond portion is the same as my base pay.

[Boglenaut]

"At What Level Does a Portfolio Take Off?"

Here is a twist:


When the losses during a pay period are twice my paycheck, and I don't freak out about it because i know gains could just as easily triple my increase that period.

[MathWizard]

I feel like the portfolio takes off when the return exceed my contributions.
For me that is was between 12 and 20 years. (2001 to 2009 for me, so returns were all over the place.)

Contributions are a linear component of the total portfolio, while returns are an
exponential component. One the exponential component vecomes the larger
component, the protfolio takes off. To me this happens at the crossing point, when
average returns exceed contributions. (You could also use the doubling time,
which would happen a little later. To get this, use the rule of 72 and your average
projected return. E.g. for a 6% return, 72/6 = 12 years, for a 4% return 72/4 = 18 years.)

[555]

Balances do not grow exponentially for most investments. They fluctuate wildly.

[letsgobobby]

by "take off at origin" do you mean because portfolio goes from zero to some positive number, even $1?

That's a rather... literal... interpretation of the OP's query.

Perhaps s/he meant, when did you portfolio graph (including contributions) take a decidedly vertical slant, excluding day of first contribution?

Assuming initial contributions of $10,000/yr, increasing at some rate x each year and with a return of y then one could get something like this:

0, 10000, 20900, 32763 etc. that is for x = 3% and y= 6%

So on a logarithmic scale the slope in the first year is infinite (of course we exclude that as a figment of arithmetic), but the slopes for all succeeding years are defined and constantly decrease on a log(assets)-time plot. We use log(assets) because by definition compound growth is linear in log(assets) vs time and we are looking for when the slope is steeper than linear, which happens at the beginning and subsides over time. Eventually the growth becomes asymptotic from below to a line with a slope of y (in appropriate units). That condition happens when contributions are completely negligible compared to returns, but if returns are constant, there is never an inflection point in the curve that can be interpreted as "take off." It just isn't in the math. As pointed out, if returns are not constant, there can be inflection points.

using linear rather than log scales is more fun.

[dbr]

using linear rather than log scales is more fun.

Indeed, but as you no doubt appreciate the appearance is deceptive.

[letsgobobby]

I appreciated it more when I didn't appreciate it.

[Toons]

"I'm retired now, but I always maxed tax-deferred, paid down the mortgage as quickly as possible, tolerated no other debt, and invested additional money into a taxable account. Along the way, I watched with great interest whenever I crossed a milestone"


Identical to what I did

I would say it was about 15 years of consistent investing(starting 1980) through all bull and bear markets for me, reinvesting all dividends and capital gains in all investments along the way.
I then noticed the effect of COMPOUNDING doing the "heavy lifting" of the portfolio

[SamB]

For me, when the earnings from all asset sources begin to exceed what I can save per year, it begins to have a greater psychological impact. If you start out with zero, or in debt, which was where I began, the most important wealth increase in my early years came from savings. Gradually, you transition, and your savings generated from excess earned income becomes a minor player in your overall wealth creation, or destruction from excess consumption.

If you are just starting out, the last thing you should be impressed with is making a killing in any given year. Of course the majority of investors have this desire for instant satisfaction, and the only portfolios that ever take off for them are those of their brokers.

[umfundi]

using linear rather than log scales is more fun.

Yes! Part of my stump pitch as a consultant is on Moore's Law. Capability for technical computing doubles every 18 months. On a log-linear plot, that's a straight line. Management doesn't understand.

But, for management presentations, I counsel people to use linear plots, and always to scale them so the knee of the curve is "today".

Keith

[The Wizard]

I feel like the portfolio takes off when the return exceed my contributions.
For me that is was between 12 and 20 years. (2001 to 2009 for me, so returns were all over the place.)

Contributions are a linear component of the total portfolio, while returns are an
exponential component. One the exponential component vecomes the larger
component, the protfolio takes off. To me this happens at the crossing point, when
average returns exceed contributions. (You could also use the doubling time,
which would happen a little later. To get this, use the rule of 72 and your average
projected return. E.g. for a 6% return, 72/6 = 12 years, for a 4% return 72/4 = 18 years.)

Baloney.
Returns are linear, directly proportional to your principal amount, whether $1M or $10M.
I explained this earlier.
Excessive kool aid consumption doesn't changee the facts...

[Sunny Sarkar]

using linear rather than log scales is more fun.

next time you say this, make sure there are no credit card debters with sharp objects close by

[BBL]

by STC » Sat Jan 05, 2013 10:39 am

My "takeoff point" was when my portfolio gain could be considered another "salary" for an educated adult. It went from me and my wife making an income. To me, my wife, and our friend the investment portfolio making an income.

I had a convesation last week about this. A friend was relaying how their total portfolio return far exceeded their W2 income in 2012. Let's say salary of 70K and portfolio return of 100K [I don't know the exact number, just the ratios but I'd bet I'm close with my guess]. He was getting a little too excited about this idea.

Maybe I took the wind out of his sails and shouldn't have but I reminded him that if he keeps going to work in 2013 he'll get at least his usual annual salary. So salary = +70K and that the market might return him another 100K just like 2012 and It might get him minus 250K. He has no plans to quit.

Oh yeah, and this:

by ResNullius » Sat Jan 05, 2013 12:37 pm

Along the way, I watched with great interest whenever I crossed a milestone, which for me was every $100K.

Some of those milestones you get to see over and over again when things get interesting.

Most investors like that milestone monitoring thing on the way up.

Some investors don't have the intestinal fortitude to handle the close monitoring during those 'risk shows up' sequences:

Awesome! I have 500K, Uh-oh make that 400K, Yikes 300K!!!!!! Initiate plan B!!! Serenity Now!

[am]

Best thing would be not to check portfolio unless necessary for transactions. This would make the volatility more tolerable. I guess this would be one reason to have an adviser, would possibly make some people stay the course more effectively.

[ResNullius]

Some of those milestones you get to see over and over again when things get interesting.

Most investors like that milestone monitoring thing on the way up.

Some investors don't have the intestinal fortitude to handle the close monitoring during those 'risk shows up' sequences:

Awesome! I have 500K, Uh-oh make that 400K, Yikes 300K!!!!!! Initiate plan B!!! Serenity Now
==================
Yes, it hard to watch your portfolio milestones when the market is dropping, but that's the way the market works. If it didn't go down from time to time, there would be no risk, thus no reward.

[555]

"Best thing would be not to check portfolio unless necessary for transactions. This would make the volatility more tolerable."

That's not right at all. Checking your portfolio every day makes the volatility more tolerable. You have to get used to it, and being exposed to it as much as possible is the best way.

[am]

"That's not right at all. Checking your portfolio every day makes the volatility more tolerable. You have to get used to it, and being exposed to it as much as possible is the best way."

Agree but some will act in destructive ways when they check and see their portfolio going down, like selling in a bear market.

[scrabbler1]

Besides what I posted about 1997 being my first takeoff year, I had several more of them in the mid-2000s. Those, however, were driven mainly by the exploding value of my company stock, as I was working only part-time from 2001-2008 before I retired in 2008.

In each year from 2003-2007, the company stock rose by at least 30% with my overall retirement portfolio rising by at least $55k. It was amazing how fast it all grew in those years.

[hazlitt777]

My question is at what point did you feel your portfolio take off -- for compounding to really kick in and become noticeable, when you felt your holdings became large enough to have momentum? Time is my friend, but I'm just interested how (and if) the road gets easier ahead.

Use this calculator and you can answer the question yourself perhaps. Let's say you are projecting an average increase of 8%...pick the amount you like, put the numbers in, and you will be able to figure out when "your portfolio will take off."


http://www.dinkytown.net/java/CompoundSavings.html

[gkaplan]

I'm not sure when my portfolio took or if it ever did "take off." All I know it's been a long, steady climb, abetted by periodic contributions to my 401(k) (or TSP) and to my IRA, with occasional re-balancing, and not panicking during the downturns of the 2000s.

[FNK]

Contributions are a linear component of the total portfolio, while returns are an
exponential component.

Baloney.
Returns are linear, directly proportional to your principal amount, whether $1M or $10M.

Cool. Wizard fight.

I'm with MathWizard. You see, the principal amount grows, making cumulative returns decidedly nonlinear.

[dbr]

Contributions are a linear component of the total portfolio, while returns are an
exponential component.

Baloney.
Returns are linear, directly proportional to your principal amount, whether $1M or $10M.

Cool. Wizard fight.

I'm with MathWizard. You see, the principal amount grows, making cumulative returns decidedly nonlinear.

Funny, The exponential function is a result of integrating a differential which is linearly proportional to the function. Thus linearity of the one is the defining property that causes the other.

[mptfan]

I feel like the portfolio takes off when the return exceed my contributions.
For me that is was between 12 and 20 years. (2001 to 2009 for me, so returns were all over the place.)

By that measure, if I contribute $1,000 to my portfolio this year, and it goes up by more than $1,000, then it has taken off.

I think a better rule of thumb is when your portfolio exceeds 3 times your gross annual income.

[rgb73]

This is a pretty good question - I would say when your returns are much greater than your annual savings; however in a severe bear market this obviously works in reverse as returns wipe out any savings you might add in a given year. Thus for me its a combination of good year(s) - which you can't count on - and a big portfolio compared to your annual savings level.

[mptfan]

This is a pretty good question - I would say when your returns are much greater than your annual savings; however in a severe bear market this obviously works in reverse as returns wipe out any savings you might add in a given year. Thus for me its a combination of good year(s) - which you can't count on - and a big portfolio compared to your annual savings level.

So if I don't contribute anything to my portfolio this year, and it goes up by $100, then it has "taken off?"

[umfundi]

So if I don't contribute anything to my portfolio this year, and it goes up by $100, then it has "taken off?"

No.

Brother1 contributes $1,000 a year, earning 7%. He does that for ten years, then stops. Never contributes another dime.

Brother2 waits ten years, then starts contributing. $1,000 per year, for ever. He will NEVER catch up to Brother1.

By year 10, Brother1's portfolio is earning more than the contribution of $1,000 per year. In my book, it has "taken off".

Which is, by the way, the reason I plan to fund my kids' IRAs to the max by matching their earned income from their first penny earned at age 16 to age 30. I am convinced those savings will outweigh those made for the rest of their lives.

Keith

[livesoft]

Today's Carl Richards napkin sketch seems to apply to this thread:
http://bucks.blogs.nytimes.com/2013/01/ ... xcitement/

I'll guess he lurks here.

[ofcmetz]

Today's Carl Richards napkin sketch seems to apply to this thread:
http://bucks.blogs.nytimes.com/2013/01/ ... xcitement/

I'll guess he lurks here.

I have to agree. Sounds like he was making an extra long post for this thread.

[umfundi]

Today's Carl Richards napkin sketch seems to apply to this thread:
http://bucks.blogs.nytimes.com/2013/01/ ... xcitement/

I'll guess he lurks here.

Yes, except he forgot to label the point on the curve where the slope is 45 degrees as "Today". Always scale the graph that way.

By the way, I showed my kids the Brother1 vs. Brother2 spreadsheet. They were impressed.

I think it was Ben Franklin who said about compound interest, "the first hundred years are the hardest".

Keith

[325e]

I'm not at the take off point yet, but the contributions are at least moving up.

When my salary was $40 - $50k, it took a long time at 10-20% for contributions to add up. Now I'm able to max out and put some real money in there. Hopefully, the time will kick in soon.

[Mitchell777]

It's a personal feeling I suppose. For me it began around early 2003. Up until then I'd check my wealth a couple times a year and it would tend to move up of course especially since I was contributing money each pay, but I recall the increase really started to get my attention around that time. In 2008/2009 it took a hit of course but when I graph it even that large hit, or what seemed like a large hit, does not look so significant when graphed over 15+ years

[random user 320]

By the way, I showed my kids the Brother1 vs. Brother2 spreadsheet. They were impressed.

So was I, when I was a kid. Then I realized that's 7% before inflation, taxes, and uncertainty. And then I realized that Brother2 could easily contribute more than $1,000 if he wished, due to his much increased salary ten years later. Now I'm content to just be able to one day spend (the purchasing power of) what I've saved over the years. I think http://xkcd.com/947/ summed it up well.

[KlangFool]

Folks,

1) 1 million dollars

2) When the annual income from my portfolio exceed or equal my annual savings.

Whatever, (1) or (2) reaches first

KlangFool

[umfundi]

easily contribute more than $1,000

Part of my unstated point is that tax-advantaged savings space is limited.

Keith

[dragoncar]

Contributions are a linear component of the total portfolio, while returns are an
exponential component.

Baloney.
Returns are linear, directly proportional to your principal amount, whether $1M or $10M.

Cool. Wizard fight.

I'm with MathWizard. You see, the principal amount grows, making cumulative returns decidedly nonlinear.

Funny, The exponential function is a result of integrating a differential which is linearly proportional to the function. Thus linearity of the one is the defining property that causes the other.

You are each talking about two different functions:

Contributions are linear and returns are exponential as a function of time
Contributions are constant and returns are linear as a function of portfolio value

Either way, returns are one order higher than contributions (except, of course, where your contributions are growing!)

[random user 320]

easily contribute more than $1,000

Part of my unstated point is that tax-advantaged savings space is limited.

OK, I see your point, but it only makes the example less realistic in my mind. For instance, in Canada, Brother2 gets to carry over all his unused limits into the future years. And even in the US, limits can be extended by earning via a business rather than salary. Finally, the tax advantage comes at a cost of reduced funds accessibility and is anyway highly dependent on contribution/distribution tax brackets. This advantage can be overcome.

It wouldn't shock me to find that in the average (real-life) case, Brother2 retires not much later than Brother1, except that along the way he lives with far less stress and enjoys a happier family life. And I'm assuming that both have equal abilities and ambitions but merely choose different paths to the same retirement goal.

[letsgobobby]

My non-original observation is that the big changes seem to happen in bunches, and you have to just hang on in between - making your contributions, not sweating the long flat periods, and definitely not panicking when things crater - if you're going to still be in the game for the sharp upward movements.

It is always comforting to see the things you read about (don't miss the 20 biggest days in a decade or your historic returns will be negative instead of +10%, for example) born out in your own portfolio.

Here is a gambling analogy. When playing craps, you only get rich if you hit a hot shooter. Other than that, you lose, whether slowly or quickly, typically in a choppy fashion. But if you don't play, you can never hit the hot shooter. You have to stay at the table.

The good thing is that unlike craps, the house odds favor you in investing.

[rob]

It takes off when there are several good years in a row. Say like from late 2002 to 2007.

Yes, before a big sickle comes swooping down to wipe the jubliant smile off your face like the years 1999-2000 did for many who thought they were overnight millionaires with equities that counted "clicks or website hits" like they were counting actual revenue dollars. Those who were heavy in tech then likely have not yet recovered.

Yeah I was buying tech stock in 98 & 99 and thought I had a nack for it...... er.. how do you say not so much

It does take time but eventually the gains stay positive and even as someone starting in the late 90's I have some decent gains.

[umfundi]

... it only makes the example less realistic in my mind.

Oh, and Brother3 saved nothing but won $3 million in the lottery three weeks before he retired.

And, I know someone who did that. Don't really know what he saved, but he and 12 colleagues had a lottery club that won $30 million in the month before he retired.

Keith

[random user 320]

Oh, and Brother3 saved nothing but won $3 million in the lottery three weeks before he retired.

Haha, I wonder why you chose that scenario, rather than, eg, Brother1 getting badly hurt in a car accident in year nine. All I'm saying, Keith, is that the lesson you're teaching only holds for a very specific range of real returns, investment limits, and opportunity costs. Change some of these parameters to a more realistic value, and the picture gets much less clear.

[yb]

I think many on this board may have trouble remembering when it took forever for savings to grow (or maybe they never experienced this time at all). I remember when it took a long time to get a couple thousand in my savings account only to have it go back down to a couple hundred due to a vacation or car repair or another "major" expense. The beginning was not the steepest part of the growth curve. It took a while to get regular saving plans in place, pay off debt and even start considering questions about my portfolio. The thing about a milestone like 2x annual pay is that it is a time when it begins to be easier to see growth happening. From a previous post about the money ratios book:

I think of this from the perspectives of my friends and relatives who are either in debt or just breaking even and not doing anything to really get on the savings train. At first, it seems like savings takes forever to grow. When the market is performing badly, it looks like no progress is being made or worse, money is being lost. However, once you hit certain milestones, like 2x annual pay, the growth starts to move faster than it did before and you can see it happening in shorter time spans. This is all obvious when you do the math, of course, and this is not the time to scale back or anything, but it is a time when you can see effects of compounding interest [and continued savings] working in your favor. I was surprised at how quickly 2x went to 3x, considering how long it took to get to 2x! Seeing this happen can be an incentive to save even more or at least positive feedback that you are on the right track.

[Aptenodytes]

I think many on this board may have trouble remembering when it took forever for savings to grow (or maybe they never experienced this time at all).

[cut for space]

I was surprised at how quickly 2x went to 3x, considering how long it took to get to 2x! Seeing this happen can be an incentive to save even more or at least positive feedback that you are on the right track.

2x got to 3x faster than 1x got to 2x for some combination of these reasons:

2x to 3x is a 50% gain; whereas 1x to 2x is a 100% gain.
You saved more during the 2x to 3x period.
The market did better during the 2x to 3x period

It had nothing to do with the size of the portfolio.

[SP-diceman]

It takes off when there are several good years in a row. Say like from late 2002 to 2007.

Those were supposed to be bad years.
(because 2000-2001 was front of it)

The 1980’s into the 1990’s is more like it!

[kenyan]

It wasn't an age. It wasn't a year. It wasn't a multiple of my salary. It was one million smackaroos!

Despite the knowledge that a million "ain't what it used to be" and that it is not nearly enough for us to retire on, I anticipate that will be a very good day (at least the first time around...hopefully we don't have that day too many times). My wife doubts that it will ever happen, but I have assured her that it will be here before she knows it.