portfolio growth - compounding vs savings
portfolio growth - compounding vs savings
I'm relatively early in the accumulation phase following basically indexing/bogleheads approach and was just wondering around what number did people notice that their portfolio was growing more from compounding/returns rather than brute savings? Currently saving between 20-25% of gross. I do see the light at the end...but it's so far away at this point. Thanks!
Re: portfolio growth - compounding vs savings
You can easily calculate it yourself by expressing your contributions as a fraction of accumulated capital. Hopefully, that fraction will become smaller and smaller, and at some point become even smaller than the return you obtain from your assets.
Naturally, for assets returning zero, that will ever happen.
Naturally, for assets returning zero, that will ever happen.
Re: portfolio growth - compounding vs savings
You can control savings rate; you can't control growth. Also, whatever has happened over the last n years isn't indicative of what will happen over the next n years.
Your savings rate is great, and the most important thing for you is to keep that up.
You could guesstimate a nominal growth rate--say 5-10%--and do a simple calculation to get a rough idea of what you're interested in. For example, if your portfolio is $100K and your gross income is $100K, your portfolio will grow faster from a 25% savings rate than from 5-10% growth. With income of $100K and a portfolio of $250K, 10% growth would be about the same as 25% savings rate.
Kevin
Your savings rate is great, and the most important thing for you is to keep that up.
You could guesstimate a nominal growth rate--say 5-10%--and do a simple calculation to get a rough idea of what you're interested in. For example, if your portfolio is $100K and your gross income is $100K, your portfolio will grow faster from a 25% savings rate than from 5-10% growth. With income of $100K and a portfolio of $250K, 10% growth would be about the same as 25% savings rate.
Kevin
If I make a calculation error, #Cruncher probably will let me know.
Re: portfolio growth - compounding vs savings
It's half and half for me this year. I still save as much as I can. Market growth or fluctuation barely has any impact on my principle of savings. But if you go through a recession period (2008 or 2001), you'll notice a big bump during recovery years.s2kmw wrote:I'm relatively early in the accumulation phase following basically indexing/bogleheads approach and was just wondering around what number did people notice that their portfolio was growing more from compounding/returns rather than brute savings? Currently saving between 20-25% of gross. I do see the light at the end...but it's so far away at this point. Thanks!
Keep paying yourself first.
Time is the ultimate currency.
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Re: portfolio growth - compounding vs savings
Speaking about compounding...coupleofcents wrote:http://tenfactorialrocks.com/the-dog-ye ... investing/
These are what I call the dog years of investing. Crossing the first 10-15 years of investing is the biggest challenge most investors face before they become true believers of this principle. If you manage to survive this period, better results are ahead.
The Speed of Compounding
The returns you earned in Years 11-15 are more than the entire period from Year 1 to 10. Suddenly, time feels compressed. Your portfolio seems to have got a life! ...
Here’s the important part. A massive $150,000 (or nearly 75% of the portfolio value) came in during the second 15-year period of the 30-year cycle. Hello, Compounding!
This has, in some ways, a parallel to the other extreme example of wealth compounding of an exceptional investor – the net worth of Warren Buffett. More than 99% of his wealth was created after his 50th birthday!
Re: portfolio growth - compounding vs savings
Let's assume you are maxing out your 401K ($18,000/yr).
Now select a very conservative average return, say 6%. With a balance of $300,000, in an average year your growth will be half contribution and half growth. All averages, of course. Contributions work every year, growth - not so much...
Now select a very conservative average return, say 6%. With a balance of $300,000, in an average year your growth will be half contribution and half growth. All averages, of course. Contributions work every year, growth - not so much...
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Re: portfolio growth - compounding vs savings
You lost me thereDavid Jay wrote:Let's assume you are maxing out your 401K ($18,000/yr).
Now select a very conservative average return, say 6%...
Re: portfolio growth - compounding vs savings
As other Bogleheads have often said (sigh), it can be a slow slog for a while . . .s2kmw wrote:I'm relatively early in the accumulation phase following basically indexing/bogleheads approach and was just wondering around what number did people notice that their portfolio was growing more from compounding/returns rather than brute savings? Currently saving between 20-25% of gross. I do see the light at the end...but it's so far away at this point. Thanks!
But your reference to "following basically indexing/bogleheads approach" implies you might think a better approach might make you money faster??
Nice article, thanks!coupleofcents wrote:http://tenfactorialrocks.com/the-dog-ye ... investing/
Re: portfolio growth - compounding vs savings
There is an ugly side to the 'dog days' theory though. When you're just starting out, your portfolio will grow pretty much every month just based on the contributions. For example, if you're dropping in $1k per month to a $20k portfolio, your balance will probably go up unless it's an exceptionally bad month. If you're dropping in $1k on a $1MM portfolio, even a modest loss of 1% will far exceed the contributions. That can make one feel much more at the mercy of the market whims than when the balance was driving steadily upward month after month. I'm still well short of 15 years, but I'm beginning to see the cross over where some months the market gains or losses are greater than my contributions.
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Re: portfolio growth - compounding vs savings
That's an interesting point about being subject psychologically to market ups/downs in a bigger portfolio. Of course this could work the other way for a 1% gain makes your account look like it's growing so much faster than what you are contributing.Grogs wrote:There is an ugly side to the 'dog days' theory though. When you're just starting out, your portfolio will grow pretty much every month just based on the contributions. For example, if you're dropping in $1k per month to a $20k portfolio, your balance will probably go up unless it's an exceptionally bad month. If you're dropping in $1k on a $1MM portfolio, even a modest loss of 1% will far exceed the contributions. That can make one feel much more at the mercy of the market whims than when the balance was driving steadily upward month after month. I'm still well short of 15 years, but I'm beginning to see the cross over where some months the market gains or losses are greater than my contributions.
To counter this problem I see 2 solutions:
1. Check your balance less frequently. I think it's normal for people in the early years to check more often. After investing for a long time, you're probably more likely to just check a couple times a year since your contributions don't move the needle that much.
2. Don't look at your balance, look at the number of shares you own. This number will always go up in the accumulation phase.
Re: portfolio growth - compounding vs savings
I used this approach when I first started funding my 401K, which coincided with the market declines in '08-09. I'd check monthly and see that even after my contribution was made, the total balance had still declined. But, I viewed it as buying shares at a lower and lower price, and having the faith that the market would turn and I have greater investment gains based on the lower cost average.coupleofcents wrote:Grogs wrote:
2. Don't look at your balance, look at the number of shares you own. This number will always go up in the accumulation phase.
To the other point on compounding vs savings, I'm starting to get to the point now where certain months, the earnings will equal the contribution and I imagine in a few more years that will always be the case.
Re: portfolio growth - compounding vs savings
Here's a recent related thread. viewtopic.php?t=218897
The point at which compounding (portfolio growth) outstrips your contributions depends on a few factors. It helps to have a rising market. Usually time helps. I "felt" the compounding effect when our portfolio got into mid 6 figures. It's helpful to not pay too close attention and let things play out without prodding.
The point at which compounding (portfolio growth) outstrips your contributions depends on a few factors. It helps to have a rising market. Usually time helps. I "felt" the compounding effect when our portfolio got into mid 6 figures. It's helpful to not pay too close attention and let things play out without prodding.
Re: portfolio growth - compounding vs savings
My annual contribution equals about 4% of my portfolio. I expect annual market changes in the range of 10%, so 4% is significant. When daily or weekly market swings are equivalent to my annual contribution, then I might not notice the effects of my contributions.
In another light, my annual savings are about equal to 1 year of expenses. So each year of contributions equals 1 year of retirement. That will always be significant.
In another light, my annual savings are about equal to 1 year of expenses. So each year of contributions equals 1 year of retirement. That will always be significant.
Re: portfolio growth - compounding vs savings
coupleofcents wrote:That's an interesting point about being subject psychologically to market ups/downs in a bigger portfolio. Of course this could work the other way for a 1% gain makes your account look like it's growing so much faster than what you are contributing.Grogs wrote:There is an ugly side to the 'dog days' theory though. When you're just starting out, your portfolio will grow pretty much every month just based on the contributions. For example, if you're dropping in $1k per month to a $20k portfolio, your balance will probably go up unless it's an exceptionally bad month. If you're dropping in $1k on a $1MM portfolio, even a modest loss of 1% will far exceed the contributions. That can make one feel much more at the mercy of the market whims than when the balance was driving steadily upward month after month. I'm still well short of 15 years, but I'm beginning to see the cross over where some months the market gains or losses are greater than my contributions.
To counter this problem I see 2 solutions:
1. Check your balance less frequently. I think it's normal for people in the early years to check more often. After investing for a long time, you're probably more likely to just check a couple times a year since your contributions don't move the needle that much.
2. Don't look at your balance, look at the number of shares you own. This number will always go up in the accumulation phase.
I think looking at the number of shares owned really helps when the market is down.
Re: portfolio growth - compounding vs savings
This can be calculated for the hypothetical case ofs2kmw in original post wrote:... around what number did people notice that their portfolio was growing more from compounding/returns rather than brute savings?
- An initial portfolio balance (PB) of $0.
- A constant amount saved (AS) each year.
- A constant annual growth rate (GR).
Code: Select all
50 = 1 / 0.02
35.003 = NPER(0.02, -1, 0, 50, 0)
Code: Select all
2% Growth Rate 4% Growth Rate
------------------- -------------------
Portfolio Savings Portfolio Savings
Year Balance Increase Balance Increase
Code: Select all
1 1,000 1,000
2 2,020 100.0% 2,040 100.0%
3 3,060 49.5% 3,122 49.0%
4 4,122 32.7% 4,246 32.0%
5 5,204 24.3% 5,416 23.5%
6 6,308 19.2% 6,633 18.5%
7 7,434 15.9% 7,898 15.1%
8 8,583 13.5% 9,214 12.7%
9 9,755 11.7% 10,583 10.9%
10 10,950 10.3% 12,006 9.4%
11 12,169 9.1% 13,486 8.3%
12 13,412 8.2% 15,026 7.4%
13 14,680 7.5% 16,627 6.7%
14 15,974 6.8% 18,292 6.0%
15 17,293 6.3% 20,024 5.5%
16 18,639 5.8% 21,825 5.0%
17 20,012 5.4% 23,698 4.6%
18 21,412 5.0% 25,645 4.2%
19 22,841 4.7% 27,671 [3.9%]
20 24,297 4.4% 29,778 3.6%
21 25,783 4.1% 31,969 3.4%
22 27,299 3.9% 34,248 3.1%
23 28,845 3.7% 36,618 2.9%
24 30,422 3.5% 39,083 2.7%
25 32,030 3.3% 41,646 2.6%
26 33,671 3.1% 44,312 2.4%
27 35,344 3.0% 47,084 2.3%
28 37,051 2.8% 49,968 2.1%
29 38,792 2.7% 52,966 2.0%
30 40,568 2.6% 56,085 1.9%
31 42,379 2.5% 59,328 1.8%
32 44,227 2.4% 62,701 1.7%
33 46,112 2.3% 66,210 1.6%
34 48,034 2.2% 69,858 1.5%
35 49,994 2.1% 73,652 1.4%
36 51,994 [2.0%] 77,598 1.4%
37 54,034 1.9% 81,702 1.3%
38 56,115 1.9% 85,970 1.2%
39 58,237 1.8% 90,409 1.2%
40 60,402 1.7% 95,026 1.1%