At What Level Does a Portfolio Take Off?

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Alf 101
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At What Level Does a Portfolio Take Off?

Post by Alf 101 » Fri Jan 04, 2013 12:00 pm

This is not a particularly technical question; more about perception than anything technical really. I received a great deal of good advice early in life, much of which I of course ignored. Despite this I started putting money away for retirement in my 20s and generally taking the consensus Boglehead road -- lower costs, diversification, live below your means,stay the course, max out 401K and Roth opportunities.

Over time I have watched my portfolio wobble upwards. In some years, it's been by about as much as I put in, or a little less, but I stuck to the plan, knowing time was my friend.

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.

dbr
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Re: At What Level Does a Portfolio Take Off?

Post by dbr » Fri Jan 04, 2013 12:03 pm

Alf 101 wrote:This is not a particularly technical question; more about perception than anything technical really. I received a great deal of good advice early in life, much of which I of course ignored. Despite this I started putting money away for retirement in my 20s and generally taking the consensus Boglehead road -- lower costs, diversification, live below your means,stay the course, max out 401K and Roth opportunities.

Over time I have watched my portfolio wobble upwards. In some years, it's been by about as much as I put in, or a little less, but I stuck to the plan, knowing time was my friend.

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.
The answer probably depends on the secular trends in market returns. If you started investing in 1982, you probably saw your portfolio take off from the get go. If you started investing in 2000, there hasn't been much of a take off although bonds have had a favorable wind for awhile.

I started investing in the early sixties, so have experienced take off and flat that can extend for years, even decades.

livesoft
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Re: At What Level Does a Portfolio Take Off?

Post by livesoft » Fri Jan 04, 2013 12:09 pm

It takes off when there are several good years in a row. Say like from late 2002 to 2007.
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Grt2bOutdoors
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Re: At What Level Does a Portfolio Take Off?

Post by Grt2bOutdoors » Fri Jan 04, 2013 12:14 pm

In my experience, it was somewhere between the tenth and twelvefth year. During the last twenty years I've experienced two major booms and two major busts including elimination of defined benefit plans and a major cut to defined contribution benefit. The key besides time is to LBYM, watch expenses, rebalance and stay the course.
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FNK
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Re: At What Level Does a Portfolio Take Off?

Post by FNK » Fri Jan 04, 2013 12:16 pm

The year portfolio returns outpace savings. Say, you add $10k and the portfolio is up $20k. That's when.

therub
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Re: At What Level Does a Portfolio Take Off?

Post by therub » Fri Jan 04, 2013 12:17 pm

According to http://www.bogleheads.org/forum/viewtop ... 0&t=104668, the consensus is that occurs at age 40 +- 5.

According to http://www.bogleheads.org/forum/viewtop ... 0&t=100863, it happens once your savings equal twice your annual pay.
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Re: At What Level Does a Portfolio Take Off?

Post by Grt2bOutdoors » Fri Jan 04, 2013 12:17 pm

livesoft wrote: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.
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wesleymouch
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Re: At What Level Does a Portfolio Take Off?

Post by wesleymouch » Fri Jan 04, 2013 12:25 pm

For me it came in my 50's. My portfolio had grown and I was getting closer to retirement but I neglected to decrease my stock allocation accordingly. It is wise in your late middle ages to contsruct a portfolio that can withstand a 50% global sell off like happened in 2008.

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BolderBoy
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Re: At What Level Does a Portfolio Take Off?

Post by BolderBoy » Fri Jan 04, 2013 12:27 pm

FNK wrote:The year portfolio returns outpace savings. Say, you add $10k and the portfolio is up $20k. That's when.
+1

This seems to me to be the best, overall answer. It is what stimulates one to save ever more and more.

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Re: At What Level Does a Portfolio Take Off?

Post by bottlecap » Fri Jan 04, 2013 12:41 pm

I think this is a complete myth. There is no level at which a portfolio "takes off" due to supercharged compounding. Your gains are a percentage of your portfolio and that's it. Your losses are the same. The fact that it may gain more at some point than you might put in is not because the portfolio is "taking off" but because you are closer to your end goal. That growth is already factored into your end goal.

Incidentally, your portfolio will also at some point be losing more than you put in during the year. People don't ask "At what critical mass does your portfolio really crap the bed?", but this question is based on precisely the same assumptions the original question.

Although people suggest that there is some critical mass at which compounding becomes more valuable, I'm pretty sure that it's just a psychological trick we play on ourselves.

JT

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Pennstateclj1
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Re: At What Level Does a Portfolio Take Off?

Post by Pennstateclj1 » Fri Jan 04, 2013 12:42 pm

therub wrote:According to http://www.bogleheads.org/forum/viewtop ... 0&t=100863, it happens once your savings equal twice your annual pay.
I started this thread, and I think the majority of responses were that 3X-4X salary was when people really noticed a difference, and the portfolio swings could be greater than the income earned in one year.

Two times pay wasn't the takeoff point, but it's the hardest to reach because it requires more saving on your part. After that your contributions are less effective.

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Tim_in_GA
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Re: At What Level Does a Portfolio Take Off?

Post by Tim_in_GA » Fri Jan 04, 2013 12:42 pm

Mine has tried to take off a couple of times only to be pulled back by something. After 10 years it is pulling away again. I haven't updated for the last quarter yet.



Image

Snowjob
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Re: At What Level Does a Portfolio Take Off?

Post by Snowjob » Fri Jan 04, 2013 12:49 pm

bottlecap wrote:I think this is a complete myth. There is no level at which a portfolio "takes off" due to supercharged compounding. Your gains are a percentage of your portfolio and that's it. Your losses are the same. The fact that it may gain more at some point than you might put in is not because the portfolio is "taking off" but because you are closer to your end goal. That growth is already factored into your end goal.

Incidentally, your portfolio will also at some point be losing more than you put in during the year. People don't ask "At what critical mass does your portfolio really crap the bed?", but this question is based on precisely the same assumptions the original question.

Although people suggest that there is some critical mass at which compounding becomes more valuable, I'm pretty sure that it's just a psychological trick we play on ourselves.

JT
Great perspective, I never thought about the reverse, I guess its just that historical upside bias that we percieve will persist into the future.

sscritic
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Re: At What Level Does a Portfolio Take Off?

Post by sscritic » Fri Jan 04, 2013 12:57 pm

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

Wagnerjb
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Re: At What Level Does a Portfolio Take Off?

Post by Wagnerjb » Fri Jan 04, 2013 1:16 pm

Grt2bOutdoors wrote:In my experience, it was somewhere between the tenth and twelvefth year. During the last twenty years I've experienced two major booms and two major busts including elimination of defined benefit plans and a major cut to defined contribution benefit. The key besides time is to LBYM, watch expenses, rebalance and stay the course.
I don't have my personal spreadsheets here at work, but I believe this is probably true for me as well. Around year 10, I might have had 3x my salary in total savings. At that young age, my asset allocation was 80% equities. And that point in my life was the early 1990's when we had some 30% equity gains in the market. If you have 3x your salary in savings and the market surges by 30%*, you will see the investment gains approximate what you earned in salary for the entire year.

* The S&P500 gained 32% in 1989, 30% in 1991, 38% in 1995 and 33% in 1997.

Be diligent, be patient, don't market time. When the big wave comes (a great year for equities) you will see a nice surge.

Best wishes.
Andy

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Re: At What Level Does a Portfolio Take Off?

Post by letsgobobby » Fri Jan 04, 2013 1:18 pm

Thank you Tim_in_GA for that post!

I think it would be fun for everyone to post a similar graphic, sans values as you did. Especially for those who have been investing for several decades, it could inspire (or temper?) the hopes of others.

I can't do this from work (and you can see I am working *so* hard today) but I will try when I get home.

My portfolio has yet to reach some kind of escape velocity, if that is what OP is asking. As long as contributions are 10-15% of my portfolio value (which they currently are) it does not seem likely to happen. I've been investing 15 years, but no significant money into the portfolio until 9 years ago.

sscritic
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Re: At What Level Does a Portfolio Take Off?

Post by sscritic » Fri Jan 04, 2013 1:46 pm

I don't do graphs. Here are some scaled numbers:
145
158
157
125
118
108
130
316
348
397
420
374
447
498
523
459
(1997 to 2012)

When did I sell a house? When did I buy a house? When did I get divorced? When did I retire? When was 2000? When was 2008? What did you learn from these numbers?

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Re: At What Level Does a Portfolio Take Off?

Post by letsgobobby » Fri Jan 04, 2013 2:09 pm

Pennstateclj1 wrote:
therub wrote:According to http://www.bogleheads.org/forum/viewtop ... 0&t=100863, it happens once your savings equal twice your annual pay.
I started this thread, and I think the majority of responses were that 3X-4X salary was when people really noticed a difference, and the portfolio swings could be greater than the income earned in one year.

Two times pay wasn't the takeoff point, but it's the hardest to reach because it requires more saving on your part. After that your contributions are less effective.
Multiple of savings each year seems more useful, since some people save 5% of their income and some people save 75%.

RobInCT
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Re: At What Level Does a Portfolio Take Off?

Post by RobInCT » Fri Jan 04, 2013 2:37 pm

I think answers given in numbers of years fail to take account of enough variables to be useful. Even assuming relatively constant, or gently upsloping quantities invested, it really depends which 10-12 year period you pick.

Tim_in_GA's experience pretty much tracks my own, though I started 2.5 years before him and so got hit with the dot com burst immediately out of the gate. For those of us who have been investing in the 10-14 year range, it's been a hard slog.

I'm going to guess that OP and I are about the same age/have been investing about the same amount of time. I stay the course, but I've never in my entire investing life ever felt like compounding was doing much/any of the heavy lifting for me. I trust that in the very long term things will change, but those of us under 40 haven't necessarily had the same experience as those of you who are 50+.

dbr
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Re: At What Level Does a Portfolio Take Off?

Post by dbr » Fri Jan 04, 2013 2:45 pm

Actually a portfolio takes off the most at the beginning because compounding of assets is on average a constant process (in logarithmic terms), but at the beginning growth from contributions is huge. A large portfolio is not as much benefited by contributions and can rely only on compounding.

I made a graph of this using annual contributions increasing by x% a year and return on investment compounding at y% a year for various x and y. On a logarithmic scale the plot clearly is steepest at the beginning and highly convex downwards. For a compound investment that does not take off, a logarithmic plot would be a straight line.

dbr
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Re: At What Level Does a Portfolio Take Off?

Post by dbr » Fri Jan 04, 2013 2:46 pm

RobInCT wrote:I think answers given in numbers of years fail to take account of enough variables to be useful. Even assuming relatively constant, or gently upsloping quantities invested, it really depends which 10-12 year period you pick.

Tim_in_GA's experience pretty much tracks my own, though I started 2.5 years before him and so got hit with the dot com burst immediately out of the gate. For those of us who have been investing in the 10-14 year range, it's been a hard slog.

I'm going to guess that OP and I are about the same age/have been investing about the same amount of time. I stay the course, but I've never in my entire investing life ever felt like compounding was doing much/any of the heavy lifting for me. I trust that in the very long term things will change, but those of us under 40 haven't necessarily had the same experience as those of you who are 50+.
Yes, that what is meant by secular bear and bull market periods.

FillorKill
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Re: At What Level Does a Portfolio Take Off?

Post by FillorKill » Fri Jan 04, 2013 3:14 pm

Well, Alf in your question you use the terms 'feel' and 'felt' so using those emotional qualitative criteria I can say this:

When during a bear market you wonder if you will ever, ever get back to your former glorious portfolio high. :shock:

When during a bull run you start looking at the bigger place, that imported sedan you always wanted, maybe the proverbial '$5,000 watch'; you start wondering if you can retire a few years earlier than planned, and gee am I really just some kind of genius or does the universe just love me??? :D :moneybag

YMMV - but if you play your cards right you can get some really great advice on that $5,000 watch. :beer

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Re: At What Level Does a Portfolio Take Off?

Post by Woodshark » Fri Jan 04, 2013 3:23 pm

There can be down years that really take the wind out of your expectations. My wife is a public school teacher. I remember a few years ago when we met with the local representative for an annual meeting to go over her retirement investments and make any changes. During the meeting I asked the rep to run a cost basis on her accounts.

She had been contributing for over 15 years but the value of her portfolio, including reinvestments, was, at the time, lower than the amount she had contributed over all those years. Because the market was so low, she would have been better off stashing 15 years of retirement contributions under her bed than invested in the market. It was a sobering moment to be sure.

She did not bail out but "stayed the course" and now that same account is looking much better.

wesleymouch
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Re: At What Level Does a Portfolio Take Off?

Post by wesleymouch » Fri Jan 04, 2013 3:32 pm

If you invest conservatively or in the Permanent Portfolio the good news is that you rarely have down years. I have been investing since the mid 1980s (close to 30 yrs) and have only had two down years: 2000 down -1.1% and 2008 down -10%. The key was to not have big drawdowns that may demoralize you and cause you to lock in losses. After that, compounding takes its effect and you keep getting richer and richer. Investing is "Winning the Loser's Game". Avoid hitting losers and it will take care of itself.

gt4715b
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Re: At What Level Does a Portfolio Take Off?

Post by gt4715b » Fri Jan 04, 2013 4:12 pm

I think there are two components to the "take-off" point that you describe: 1. having a considerable account size and 2. a year (or series of years) of outsized returns. This is because the combination of these two components will cause you to look at you account after not having looked at in awhile and say "Oh man! I'm making some serious money"

I do think you need to have an account size around 3-4 times your annual salary to get to this point. I say that because my account is 2.5x and I earned around 15% this year and I didn't quite have that feeling. But, if your account 4x and you get a 20% return in a year your account would grow by 80% of your salary, which is serious growth.

Keep the faith!

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Re: At What Level Does a Portfolio Take Off?

Post by White Coat Investor » Fri Jan 04, 2013 4:18 pm

Not yet. I started in 2004 and even after 3-4 good years my contributions are still 80% of the value of my portfolio. Part of that is the fact that my contributions have gradually climbed from $8K/year to 10 times that much over those 9 years, so most of the money was only added recently. But the portfolio this year made more than I contributed to it the first 3 years or so!
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Re: At What Level Does a Portfolio Take Off?

Post by scrabbler1 » Fri Jan 04, 2013 5:58 pm

The year 1997 was my big takeoff year. First, my nonwage income rose more quickly than my wage income in dollar terms. Second, I was paying down my mortgage that year and saw that the amount I had withdrawn from one mutual fund equaled how much I had bought into the fund, yet I still had that amount still in the fund. So I was now playing with the house's money. I also had to start paying some estimated income taxes because of the added income.

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Re: At What Level Does a Portfolio Take Off?

Post by dan23 » Fri Jan 04, 2013 6:16 pm

letsgobobby wrote:
Pennstateclj1 wrote:
therub wrote:According to http://www.bogleheads.org/forum/viewtop ... 0&t=100863, it happens once your savings equal twice your annual pay.
I started this thread, and I think the majority of responses were that 3X-4X salary was when people really noticed a difference, and the portfolio swings could be greater than the income earned in one year.

Two times pay wasn't the takeoff point, but it's the hardest to reach because it requires more saving on your part. After that your contributions are less effective.
Multiple of savings each year seems more useful, since some people save 5% of their income and some people save 75%.
Exactly. If we assume 8% returns and your are paying taxes outside of the portfolio, the point where your increase from profit > increase from savings varies by your savings rate and is as follows:
savings rate / salary multiple of savings takeoff point
10% 1.25
15% 1.875
20% 2.5
25% 3.125
30% 3.75
35% 4.375
40% 5
45% 5.625
50% 6.25
55% 6.875
60% 7.5

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stratton
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Re: At What Level Does a Portfolio Take Off?

Post by stratton » Fri Jan 04, 2013 6:32 pm

A big milestone for me was when my 401k had more in it than what I made in gross salary.

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Re: At What Level Does a Portfolio Take Off?

Post by 555 » Fri Jan 04, 2013 6:39 pm

There is no such thing as a "Level" at which your "Portfolio Take Off"? The idea is just nonsense as bottlecap spelled out above.

dbr
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Re: At What Level Does a Portfolio Take Off?

Post by dbr » Fri Jan 04, 2013 6:56 pm

555 wrote:There is no such thing as a "Level" at which your "Portfolio Take Off"? The idea is just nonsense as bottlecap spelled out above.
That is correct. My post also pointed out that as a mathematical concept it is convincing that the initiation of investing is the only example of take off rather than any subsequent time. The analysis is not different from the comments by bottlecap.

This is also satisfying in that it is consistent with the advice to young investors to initiate saving and investing as early as possible.

One could add a simple minded analogy to an airplane trip where take off happens at the beginning of the trip at low altitude and low speed.

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Re: At What Level Does a Portfolio Take Off?

Post by harikaried » Fri Jan 04, 2013 7:31 pm

Is this mostly just comparing how much you added to savings from income over some time period vs growth from savings over the same time period?

E.g., if a 25 year-old starts with $0 savings and saves $10k a year with 7% growth, at age 30, there'll be about $57k in savings with $4k in growth or almost half of the income savings as growth. At 35, the savings is almost $140k with $10k growth -- equal to the yearly savings. At age 41, total savings is nearing $280k with growth of $20k -- twice the yearly savings. At this point does it feel like the portfolio is taking off because it's growing at least twice of the added yearly savings?

But things might not be that simple as the amount saved each year could be increasing with inflation adjustment or other pay increases. If instead of just saving $10k a year, 5% more is saved each year, at age 41, one would be saving $22k that year which is about the same as the growth in that same year. It wouldn't be until age 48 where the adjusted savings would be 30k and growth would be almost double that for 60k.

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Re: At What Level Does a Portfolio Take Off?

Post by Kenkat » Fri Jan 04, 2013 7:51 pm

I started similar to you - early 20's, save as much as possible, stick to the basics.

While I agree that this is all mostly psychological, the point at which it really hit me that I had saved real money and my portfolio performance was more important than yearly savings was:

1) My portfolio returned more than my annual salary in a given year
2) On a really good day or bad day, my portfolio went up/down by more than a Month's take home pay

For me this occurred somewhere around the year 15 mark. I started in 1998, so around 2003/2004.

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Re: At What Level Does a Portfolio Take Off?

Post by Pennstateclj1 » Fri Jan 04, 2013 8:17 pm

dan23 wrote:savings rate / salary multiple of savings takeoff point
10% 1.25
15% 1.875
20% 2.5
25% 3.125
30% 3.75
These numbers make sense based on what people report on this site and the book Your Money Ratios. The book is targeted at the average investor and the author urges readers to save 12%. Based on your numbers 2X salary would be meaningful and a "tipping point" for their savings rate. Conversely, posters on this site said 3X-4X salary, and based on polls, most people save at least 20% (and much more) which gives credence to your numbers regarding the 3X-4X tipping point.
bottlecap wrote:Incidentally, your portfolio will also at some point be losing more than you put in during the year. People don't ask "At what critical mass does your portfolio really crap the bed?", but this question is based on precisely the same assumptions the original question.
Don't we limit the downside at least to some extent by changing to a more conservative allocation and adding bonds as we accumulate? Typically, when you start out you're pretty aggressive, and swings have a smaller relative impact on your portfolio because of the lack of size, and the contribution amount matters more relative to the portfolio.

dbr wrote:One could add a simple minded analogy to an airplane trip where take off happens at the beginning of the trip at low altitude and low speed
Call me simple minded, but to continue your analogy and put it into flight references, let's compare two.

A fighter launching from an aircraft carrier- The Boglehead Method- Save a lot, really fast! Compounding has less time to work in your favor because your savings rate is so high, it's hard for compounding to surpass your savings rate. A fighter gets propelled off of the carrier, and has to put in a lot of effort early on in the takeoff to get to a smooth cruising altitude, much like we force ourselves to do. The benefit? We are a lot faster than most other planes in the sky and get to Babylon more quickly.

Alternatively, most of the populace more closely resembles a 747. The pilots still have to mash down the throttle at takeoff, but things happen more slowly. There is a lot more time barreling down the runway, and the liftoff and ascent are much less extreme. Once at cruising altitude it takes little effort compared to the effort to get off the ground. This is how the general populace invests, and why they enjoy a tipping point at a smaller salary multiple. They save closer to 10% consistently, compounding has more time to work for them, and thus they see the results of compounding more than a super saver. They don't end up with bigger portfolios by any means, and they remain in the workforce longer due to a lower savings rate.

Why do we mostly agree that the first $500,000 is the hardest and that after that your portfolio snowballs using a simple rule of 72, http://www.bogleheads.org/forum/viewtop ... 10&t=77682 but we can't agree at some point that your portfolio size and compound interest make more of a difference in this thread?

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Re: At What Level Does a Portfolio Take Off?

Post by dbr » Fri Jan 04, 2013 8:21 pm

It turns out that no matter the contribution rate or the compounding rate that the curve of log(assets) vs time is convex downward and steepest at the origin. Thus take off is at the origin.

The only thing that can distort this form is periods of low or negative returns followed by strong positive returns.

Therefore take off is at the origin and re-take-off is when a strong bull market originates.

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Re: At What Level Does a Portfolio Take Off?

Post by letsgobobby » Fri Jan 04, 2013 8:33 pm

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? 8-)

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Re: At What Level Does a Portfolio Take Off?

Post by Grt2bOutdoors » Fri Jan 04, 2013 8:39 pm

letsgobobby wrote: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? 8-)
Take off nearly always involves a combination of level,vertical and horizontal movements. The administrator of my 401k has added a neat graph similar to that posted earlier showing a 2 year month by month pattern of zigs and zags - I can assure you the ride is less of a hot air balloon and more like a bird that prefers to swoop down and glide up when market momentum allows.
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dbr
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Re: At What Level Does a Portfolio Take Off?

Post by dbr » Fri Jan 04, 2013 8:48 pm

letsgobobby wrote: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? 8-)
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.

texasdiver
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Re: At What Level Does a Portfolio Take Off?

Post by texasdiver » Fri Jan 04, 2013 9:21 pm

I'm not sure about when it takes off. But I started to take notice when on an ordinary stock market day our portfolio value went up or down in amounts that equaled or exceeded our monthly salary.

Bacchus01
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Re: At What Level Does a Portfolio Take Off?

Post by Bacchus01 » Fri Jan 04, 2013 10:37 pm

It hasn't happened for me yet, but I look at is as when the returns on my portfolio outpace my annual salary. Last year was close. I'm 39.

The inflection point for me will be when it hits 8 digits. Then I'll be "retired."

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nedsaid
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Re: At What Level Does a Portfolio Take Off?

Post by nedsaid » Sat Jan 05, 2013 12:55 am

In my experience, once the portfolio got to $10K it started to take on a life of its own. At some point, the gains and earnings get to be more than the annual contributions. At $100K, the investments seemed like a swollen creek and later like a river at $200K. You can really see the effects of compounding.

This affect is not a myth. A 20% gain on a $10K portfolio is $2K. A nice gain but not much effect to a person's finances. At $200K, this is a $40K gain. $40K is substantial money to me. Of course, to the many rich Bogleheads in this forum this is chump change.

In the late nineties, the annual portfolio gains were getting to be more than my salary.

When the market really tanked, the unrealized losses in my retirement accounts were more than what I made in a year. I joked that it seemed like I worked for free for two years.

So yes, there is a time when a portfolio starts to reach a "critical mass" and seem to have a life of its own. My annual contributions seem like peeing in a river now.
A fool and his money are good for business.

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Liquid
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Re: At What Level Does a Portfolio Take Off?

Post by Liquid » Sat Jan 05, 2013 9:09 am

nedsaid wrote:In my experience, once the portfolio got to $10K it started to take on a life of its own. At some point, the gains and earnings get to be more than the annual contributions. At $100K, the investments seemed like a swollen creek and later like a river at $200K. You can really see the effects of compounding.

This affect is not a myth. A 20% gain on a $10K portfolio is $2K. A nice gain but not much effect to a person's finances. At $200K, this is a $40K gain. $40K is substantial money to me. Of course, to the many rich Bogleheads in this forum this is chump change.

In the late nineties, the annual portfolio gains were getting to be more than my salary.

When the market really tanked, the unrealized losses in my retirement accounts were more than what I made in a year. I joked that it seemed like I worked for free for two years.

So yes, there is a time when a portfolio starts to reach a "critical mass" and seem to have a life of its own. My annual contributions seem like peeing in a river now.
Curmudgeons aside, this is spot on. Heres to peeing in a river :beer +1

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Re: At What Level Does a Portfolio Take Off?

Post by billyt » Sat Jan 05, 2013 9:33 am

I don't know. I am at 3.5x salary, and only 35% of the increase in portfolio value in 2012 was due to returns, 65% to contributions. Maybe I am too conservative. 45/55 stock/bond

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Re: At What Level Does a Portfolio Take Off?

Post by Johm221122 » Sat Jan 05, 2013 9:38 am

texasdiver wrote:I'm not sure about when it takes off. But I started to take notice when on an ordinary stock market day our portfolio value went up or down in amounts that equaled or exceeded our monthly salary.
+1
John

STC
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Re: At What Level Does a Portfolio Take Off?

Post by STC » Sat Jan 05, 2013 9:39 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.

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matjen
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Re: At What Level Does a Portfolio Take Off?

Post by matjen » Sat Jan 05, 2013 10:10 am

STC wrote:
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.
This is the way I think about it as well. When things are going up it is a wonderful feeling. Your money is working for you but you don't have the headaches of renters or some side business. When things are going down I just rely heavily on my Boglehead education to shield me from getting too emotional (depressed) and realize that in the long run it is better for my portfolio as I add more contributions and rebalance. I would imagine that the down years have to be more difficult for those not in the accumulation phase.
A man is rich in proportion to the number of things he can afford to let alone.

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Aptenodytes
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Re: At What Level Does a Portfolio Take Off?

Post by Aptenodytes » Sat Jan 05, 2013 10:19 am

There's no mathematical answer to the question. As others have pointed out, the percentage increases are highest when the portfolio is smallest, and the absolute increases keep going up without limit as the portfolio gets larger. No matter how much is in your portfolio, the increases will always be equal to the sum of new contributions and returns.

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

In other words, it isn't the portfolio that "takes off" when it hits a certain level, but rather our attitudes and affect that change at some point. When those changes kick in will depend on personality and circumstance. And there's nothing inevitable about it. The most rational investors won't go through this kind of sea change because the unfolding of the portfolio over time will be clear to them from the beginning.

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FNK
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Re: At What Level Does a Portfolio Take Off?

Post by FNK » Sat Jan 05, 2013 10:37 am

I agree that this makes no sense. It makes some feel though.

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Re: At What Level Does a Portfolio Take Off?

Post by The Wizard » Sat Jan 05, 2013 10:44 am

To add more fuel to refuting a silly premise, I would say that there's practically NO second-order effect to having a large portfolio. By that I mean a $500K portfolio will change in value EXACTLY five times as much as a $100K portfolio, ignoring new contributions.
But I'm lying a bit there. Once you have enough $$$ in a Vanguard fund, you get moved to Admiral shares with half the previous expense ratio. And I think there may still be Jumbo CDs some places that have higher rates than smaller ones.

But I agree with others that once a portfolio gets up to 10-15 times your income or expenses, the variation up OR down from month to month can be amusing to monitor...
Attempted new signature...

letsgobobby
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Re: At What Level Does a Portfolio Take Off?

Post by letsgobobby » Sat Jan 05, 2013 11:21 am

All comments considered, there seems to be some consensus that one's perspective of his portfolio changes when the annual changes in portfolio value reach some multiple of annual salary - somewhere between 50% and 100%, maybe.

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