Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+?

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Hawaiishrimp
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Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+?

Post by Hawaiishrimp » Thu Jan 05, 2017 7:19 pm

Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+?
As for myself, I didn't the power of compound interest until ~$750k portfolio. It stayed there for a while and kick in high gear! :beer :beer
I save and invest my money, so money can make money for me, so I don't have to make money eventually.

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by blinx77 » Thu Jan 05, 2017 7:43 pm

Compound interest works the same at $1 or $10 million. But I think you mean, when did I first look at my portfolio and say "wow, look at that."

I think you don't need $500k to start getting excited about compounding. My wife's retirement account (a fraction over our overall investments) went up by almost $20k even though she is a SAHM. That was pretty fun. She made more off her investments than others might have from a part-time job. That made us feel pretty good about our past efforts! :happy

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by Dollarsign16 » Thu Jan 05, 2017 7:48 pm

Once the daily swings are in the thousands, that's when I think you really start to notice... at least for me anyway. Can't wait until they're in the tens of thousands.
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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by livesoft » Thu Jan 05, 2017 7:51 pm

My portfolio never really earned interest because interest rates were always lower than what I thought equities could do. So I never thought of it as "compounding" because it was never steady.

However, I did notice a couple of things that might help answer your query:

1. I noticed when I lost almost, but not quite, a million dollars back in the beginning of 2009. It was a typical loss for the size of the portfolio.

---and---

2. I noticed one year that the portfolio had gained in the past 12 months about 4 times my annual salary. I thought that was cool. I don't think I ever noticed 1x, 2x, or 3x salary. I can't remember what the portfolio value was though.

And nowadays I expect the portfolio to fluctuate daliy by tens of thousands of dollars. If it doesn't, I notice and think "Oh, that's cool. That hasn't happened in a while."
Last edited by livesoft on Thu Jan 05, 2017 7:52 pm, edited 1 time in total.
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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by tphp99 » Thu Jan 05, 2017 7:51 pm

Once the annual portfolio increase exceeds annual contribution. Not there yet.

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by Hawaiishrimp » Thu Jan 05, 2017 7:54 pm

Dollarsign16 wrote:Once the daily swings are in the thousands, that's when I think you really start to notice... at least for me anyway. Can't wait until they're in the tens of thousands.
That's me right there. I can't wait to see it up & down in $10k range...
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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by Elbowman » Thu Jan 05, 2017 7:54 pm

I don't think it is an absolute number, but is instead relative to your savings rate. I'm excited for the day when my portfolio return is larger than my new contributions, but that is still many years away.

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by Kenkat » Thu Jan 05, 2017 7:55 pm

I think for me, it was when I realized that a really bad or really good year could either wipe out or double my entire contribution of new money for the year. I believe it was around $150k or so; when the market bottomed around 2003, I noticed it had dropped to something like $118k and I feel like after just a couple of years it had recovered and more than doubled from that number.

Now, a really bad day can wipe out the better part of new contributions for the year. While that can be a little frightening, it also makes me realize my portfolio has taken on a life of its own and has some critical mass.

I think this is a great question because too many new investors are worrying about returns (I did), when early on it is all about saving as much as you can and let time work for you.
Last edited by Kenkat on Thu Jan 05, 2017 7:56 pm, edited 2 times in total.

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by tphp99 » Thu Jan 05, 2017 7:55 pm

Dollarsign16 and livesoft, checking balances daily?

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by pierremonfrere » Thu Jan 05, 2017 7:57 pm

Immediately.

Unfortunately it's like a drug. As time goes on it takes more and more for me to get excited about it. Earning $100 a month doesn't provide quite the same reaction it did a year ago. For some that wouldn't even merit a yawn.

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by AllieTB1323 » Thu Jan 05, 2017 8:02 pm

livesoft wrote:My portfolio never really earned interest because interest rates were always lower than what I thought equities could do. So I never thought of it as "compounding" because it was never steady.

However, I did notice a couple of things that might help answer your query:

1. I noticed when I lost almost, but not quite, a million dollars back in the beginning of 2009. It was a typical loss for the size of the portfolio.

---and---

2. I noticed one year that the portfolio had gained in the past 12 months about 4 times my annual salary. I thought that was cool. I don't think I ever noticed 1x, 2x, or 3x salary. I can't remember what the portfolio value was though.

And nowadays I expect the portfolio to fluctuate daliy by tens of thousands of dollars. If it doesn't, I notice and think "Oh, that's cool. That hasn't happened in a while."
Yup, as we sit on the deck sipping wine, my DW will ask how we did today and my favorite answer is we made or lost more than we earned in a year back in the eighties. It's all noise.

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by Dollarsign16 » Thu Jan 05, 2017 8:04 pm

tphp99 wrote:Dollarsign16 and livesoft, checking balances daily?
Guilty :oops:

Well, maybe not consistently every day but close enough.
Too many people spend money they earned..to buy things they don’t want..to impress people they don’t like. –Will Rogers

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by Ged » Thu Jan 05, 2017 8:04 pm

It wasn't compound interest that really started impressing me and making me think of retirement. It was the gains following the market crash in 2008.

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by Grt2bOutdoors » Thu Jan 05, 2017 8:06 pm

When the monthly portfolio increase or decrease equals or exceeds the monthly contribution. It wasn't pretty last February but the remainder of the year's performance made up for it.
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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by vitaflo » Thu Jan 05, 2017 8:16 pm

Happened at $1m for me. When I see a 0.5% gain for the day and then see that translates into $5,000 is when it made me sit up and take notice.

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by hille141 » Thu Jan 05, 2017 8:43 pm

tphp99 wrote:Once the annual portfolio increase exceeds annual contribution. Not there yet.
Agree, when your money is making more than you are contributing, compounding interest is dominate.

Say you are maxing a 401k at $18k per year and the portfolio returns 8% annually, after 10 years the interest accrues faster than the contribution does.

Contribution Interest Portfolio Value Return
1 $18,000 $18,000 8%
2 $18,000 $1,440 $37,440
3 $18,000 $2,995 $58,435
4 $18,000 $4,675 $81,110
5 $18,000 $6,489 $105,599
6 $18,000 $8,448 $132,047
7 $18,000 $10,564 $160,610
8 $18,000 $12,849 $191,459
9 $18,000 $15,317 $224,776
10 $18,000 $17,982 $260,758
11 $18,000 $20,861 $299,619
12 $18,000 $23,970 $341,588
13 $18,000 $27,327 $386,915
14 $18,000 $30,953 $435,869
15 $18,000 $34,869 $488,738
16 $18,000 $39,099 $545,837
17 $18,000 $43,667 $607,504
18 $18,000 $48,600 $674,104
19 $18,000 $53,928 $746,033
20 $18,000 $59,683 $823,715

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by Phineas J. Whoopee » Thu Jan 05, 2017 8:46 pm

This is fantastic! Compound interest kicks in when one greatly reduces contributions! :happy

OP: livesoft is right. I didn't get where I am today from interest. I got here, along with sometimes painful savings, from total return. If you aren't prepared, right now, to explain the difference to somebody who never heard of the latter you may wish to study a bit. It's best to use standard financial terms properly. A stock market mutual fund is not a savings account.

No offense intended, maybe you were using the term colloquially and can explain the differences, but often when somebody speaks that way they are missing important details. If that isn't you, then great. Here at bogleheads.org standard financial terms are generally interpreted to mean their definitions. Using them differently leads to misunderstandings, great wastes of time, and sometimes contentious disagreements with hurt feelings.

Several years, the ones that stand out in my mind although a minority, but nonetheless several, I saw negative total return and a decline in the value of my portfolio that swamped out my new contributions and then some a lot.

I don't know how anybody can say the definition is when total return exceeds contributions, because the very next year returns may be severely negative. Does compound total return really kick in one year and then decisively kick out the next one? How often and when that has happened in the past two or three decades is left as an exercise for the reader.

PJW

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by bligh » Thu Jan 05, 2017 9:14 pm

Hawaiishrimp wrote:Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+?
As for myself, I didn't the power of compound interest until ~$750k portfolio. It stayed there for a while and kick in high gear! :beer :beer
I think you notice it as a proportion of your total annual contribution and how closely you pay attention. If you portfolio moves up or down by $10K in a year you tend to contribute $20K a year, you would notice this 50% boost or 50% decrease. As hillie141 stated, assuming your total annual contribution remains consistent, the effect would act as a function of number of years contributed. So after the first 4 or 5 years of investing the returns would start to make a noticeable difference.

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by KlangFool » Thu Jan 05, 2017 9:22 pm

Phineas J. Whoopee wrote:This is fantastic! Compound interest kicks in when one greatly reduces contributions! :happy

OP: livesoft is right. I didn't get where I am today from interest. I got here, along with sometimes painful savings, from total return. If you aren't prepared, right now, to explain the difference to somebody who never heard of the latter you may wish to study a bit. It's best to use standard financial terms properly. A stock market mutual fund is not a savings account.

No offense intended, maybe you were using the term colloquially and can explain the differences, but often when somebody speaks that way they are missing important details. If that isn't you, then great. Here at bogleheads.org standard financial terms are generally interpreted to mean their definitions. Using them differently leads to misunderstandings, great wastes of time, and sometimes contentious disagreements with hurt feelings.

Several years, the ones that stand out in my mind although a minority, but nonetheless several, I saw negative total return and a decline in the value of my portfolio that swamped out my new contributions and then some a lot.

I don't know how anybody can say the definition is when total return exceeds contributions, because the very next year returns may be severely negative. Does compound total return really kick in one year and then decisively kick out the next one? How often and when that has happened in the past two or three decades is left as an exercise for the reader.

PJW
PJW,

+1

When the annual total return exceeds your annual contribution either positively or negatively.

KlangFool

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by Phineas J. Whoopee » Thu Jan 05, 2017 9:35 pm

KlangFool wrote:...

PJW,

+1

When the annual total return exceeds your annual contribution either positively or negatively.

KlangFool
So, if there was an extreme down year in which the decline exceeds the contribution such that the value of the portfolio is lower than a year earlier, compound interest has really kicked in for you, and if the next year was extremely up, from the lower level, such that the gain from the previous year exceeds the contribution, compound interest really kicked in for you again, and they were followed by three lower-volatility years then compound interest decisively kicked out for you, then decisively kicked out for you again, then decisively kicked out for you again?

Your assertion, not you but your assertion, is incoherent.

PJW

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by MoonOrb » Thu Jan 05, 2017 9:42 pm

Huh, I've never really thought about it. I just see myself on a long march towards the goal of financial security. I think of this as probably being x years away instead of x dollars away.

If things change and there is a rapid growth in our accounts and x years away all of a sudden looks a lot more like x-5 years away, I suppose that's when I will have noticed.

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by Dottie57 » Thu Jan 05, 2017 9:52 pm

Phineas J. Whoopee wrote:
I don't know how anybody can say the definition is when total return exceeds contributions, because the very next year returns may be severely negative. Does compound total return really kick in one year and then decisively kick out the next one? How often and when that has happened in the past two or three decades is left as an exercise for the reader.

PJW
But you have to admit it is very nice when 509k becomes 588k. (401k). I haven't calculated returns for iras and taxable.

I do indeed remember the financial crisis when I had trouble sleeping at night.. not good at all.
Last edited by Dottie57 on Thu Jan 05, 2017 9:54 pm, edited 1 time in total.

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by KlangFool » Thu Jan 05, 2017 9:53 pm

Phineas J. Whoopee wrote:
KlangFool wrote:...

PJW,

+1

When the annual total return exceeds your annual contribution either positively or negatively.

KlangFool
So, if there was an extreme down year in which the decline exceeds the contribution such that the value of the portfolio is lower than a year earlier, compound interest has really kicked in for you, and if the next year was extremely up, from the lower level, such that the gain from the previous year exceeds the contribution, compound interest really kicked in for you again, and they were followed by three lower-volatility years then compound interest decisively kicked out for you, then decisively kicked out for you again, then decisively kicked out for you again?

Your assertion, not you but your assertion, is incoherent.

PJW
PJW,

Let's say your annual savings is X. Your portfolio value is Y at the beginning of the year.

A) If by the end of the year, your portfolio value is Y or lower. Your annual total loss is so much that it wiped out your annual savings.

B) On the other hand, if by the end of the year, your portfolio value is (Y + 3X) or bigger, the annual total return is big enough that even if you did not save, it does not matter. The gain (2X) is at least 2 times larger than your annual saving.

This is how I feel by the end of the year. It has nothing to do with previous n number of years. Total annual return or loss is big enough to exceed my annual saving.

KlangFool

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by Phineas J. Whoopee » Thu Jan 05, 2017 10:01 pm

Hi Dottie57 and KlangFool,

I'm happy you're in touch with your feelings, but your feelings are not the subject of the thread. The OP asked, and the thread is about, at what point compound interest really kicked in for you.

My response was to the proposition that compound interest really kicked in when portfolio gains became greater than new contributions.

I wish you both the best of compound total returns, and feelings, in this and every year to come.

PJW

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by MrKnight » Thu Jan 05, 2017 10:29 pm

I think it depends on your investments and rate of return. If you hold a 100% bond portfolio you probably will need more principal to feel the effects of compounding interest compared to 100% stock portfolio.

For myself with a 100% stock portfolio, I began to feel the effects of compounding at $100,000, but I think it really becomes noticeable at $200,000 because the interest begins to match or exceed annual contribution limit for a 401K.

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by scubadiver » Thu Jan 05, 2017 10:32 pm

Our portfolio is currently greater than it was last year at this time by an amount equal to a little more than my annual salary. NOTE: I did not contribute 100% of my earnings to savings last year. Hard not to notice that.

Scubadiver

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by badbreath » Thu Jan 05, 2017 10:58 pm

I have to agree its when the annual total return exceeds your annual contribution either positively or negatively. Mine was positive this year.
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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by HomerJ » Thu Jan 05, 2017 11:12 pm

Elbowman wrote:I don't think it is an absolute number, but is instead relative to your savings rate. I'm excited for the day when my portfolio return is larger than my new contributions, but that is still many years away.
This.

When you save $10k, and your portfolio goes up $20k that year, or when you save $30k, and your portfolio goes up $60k that year, that's when you really notice... Just my opinion of course.

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by McGilicutty » Thu Jan 05, 2017 11:43 pm

I would say you can feel it at $500K. With that much invested in SPY you made about $7,000 the first two market days of this year. Of course, you gave some of that back today, but that's still a pretty good (but atypical) return for two days.

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by White Coat Investor » Thu Jan 05, 2017 11:51 pm

Other than 2009, I think my contributions have always been more than what the portfolio produced, but I've had an increasing income and contributions most years.

At an 8% return and steady $30K contributions, the portfolio will start gaining more than the contribution in about year 10, at around $400K.
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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by ClevrChico » Fri Jan 06, 2017 12:01 am

I noticed when very short gains were multiples of what I'd make over an entire summer as a student working in a hot kitchen. I love that passive income!

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by assetsforallocation » Fri Jan 06, 2017 7:27 am

By compound interest do we mean the compounding part? I calculate about 10 years in the compounding part only accounts for 5% of your total assets. Test: Run a spreadsheet on two columns, one where interest compounds and one where you only get interest on contributions. Based on certain interest rate assumptions, assuming a constant annual dollar amount of contribution, compound interest becomes about 5% in about 10 years.

Or are we talking about the fraction of the portfolio constituting gains? Again assuming 8% IRR, I got to about 31% in 10 years (assuming again the contribution rate remains constant, etc.)

My annual dollar amount of contribution has grown in violation of my assumptions above which diminishes the effect, but still not too incredibly far from this ballpark about 10 years out of school.

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by dcabler » Fri Jan 06, 2017 8:07 am

OK I'm assuming like others that the OP meant total returns. Is there a point where returns exceed contributions? Might not happen on a year in/year out basis even up to your very last year when you stop making contributions. There will always be a dependency of what % a contribution represents relative to your portfolio size and the portfolio's returns. Nothing's guaranteed.

If you use Fidelity, I kind of like to look at "performance" tab and at the bottom of the new page, the "what drove your change in balance" section. I click to "since inception". Nice graph that includes balances as well as "account balances if not invested for the period". This is cumulative. For me, the blue line was always above the orange line until it wasn't in Oct 2008. Since 2010 blue has been consistently above the orange line with the difference growing. And you can always look at the last point on the graph and quickly calculate what sort of loss it would take to set you back to where balance equals total contributions (or worse). Too bad they don't include the data from other accounts via Full View.

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by nisiprius » Fri Jan 06, 2017 8:45 am

As others have noted, the whole point about compound interest is that it scales. Doubling your money is doubling your money, and at 7.2% interest you double it every ten years no matter if its $1,000 or $1,000,000. There isn't some dollar amount at which it "kicks in."

Of course, the point at which I was really impressed was around 1996 or so, when I looked at my quarterly statement and said to my wife "Wow! All the funds have been going great guns." Alas, it didn't last.

It was also very impressive around that time to look back on my TIAA-CREF account, where I'd been putting in between, say, $6,000 and $9,000 a year for years, starting in the 1990s, and saw how much it had grown. That's especially interesting because I'm talking about TIAA Traditional which is not stocks.

Unfortunately, I'm sorry to say that for me, anyway, no matter what the total is, the total, X, always looks big compared to the annual 5% (or 2% or 8%), which always looks puny by comparison. The money rolling in from the portfolio never looks that big when you look at the portfolio itself. Perhaps what happens is that there is a part of our mind innumerate enough that the size of the returns is comprehensible but the size of the portfolio itself is in the vague world of "jillions." Supposedly there are language that have only four words for numbers: one, two, three, and "many." Our brains all have a bit of that in our wiring.
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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by dbr » Fri Jan 06, 2017 9:54 am

Don't forget the question about compounding is not how much wealth increases because of return on the principle. The question is how much wealth is increasing due to return on previous return. The existing principal comprises original sums contributed plus accumulated return and it is return on that return that the question would be about. How many people even know a number like that for their investments?

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Re: Experienced investor: For your portfolio, at what point compound interest really kick in for you? $500k? $1million+

Post by qwertyjazz » Fri Jan 06, 2017 10:10 am

Phineas J. Whoopee wrote:Hi Dottie57 and KlangFool,

I'm happy you're in touch with your feelings, but your feelings are not the subject of the thread. The OP asked, and the thread is about, at what point compound interest really kicked in for you.

My response was to the proposition that compound interest really kicked in when portfolio gains became greater than new contributions.

I wish you both the best of compound total returns, and feelings, in this and every year to come.

PJW
PJW
This thread reads to me interestingly as feelings about money. 'Kick in' has no mathematical definition other than a personal emotional one or a average survey type definition. Given that 'kicked in' has to be taken as emotional, the rest of the argument - I think - cannot be parsed except in emotional terms.
There exists a fascinating interface of the explicit mathematics and the implicit (possibly) undefinable emotional. I think that is a large portion of finance discussions. Both types have their own language and confusion occurs as there is no (non-mathematical optimization framework) common language which can be written
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