Newbie Thoughts: Your portfolio will double three times in your life

Your portfolio will double three times in your life.

Many readers of this blog, including possibly me, will never be good investors. I know that is not the attitude to have when you are trying to beat the market but we need to be realistic at times. Very few can outperform the markets, and, like any business—investing is a business—only a few will succeed. Even those that seem to be pretty good may start trailing off as their life changes (marriage, kids, better career, greater interest in other activities, and so on.)

I'm not saying that those that have the time and resources to pursue investing on their own should give up. Indeed, I'm not giving up. Not just yet. Rather, I think it is worthwhile considering what is a realistic outcome for our portfolios.

My personal opinion is that a good rule of thumb is to assume that your portfolio will likely double three times in your whole life! Think about that a lot and plan your life accordingly—at least that's what I'm doing. The actual outcome depends on a whole hoard of details, and is based on some assumptions, but here is how I think about it.


How Do I Arrive At That?

I am assuming that you are relatively young and have a 30 year investment time horizon. Basically, it's as if one started investing when they were 30 and "stopped" when they were 60. Obviously your details may be slightly different.

In the long run, stocks return around 8% to 10% per year; real estate is hard to measure but it returns around 6% to 8%; bonds return around 5%; and cash/gold around 2% to 3%. Given how I'm looking at someone who is starting out, I think it is reasonable to expect one to have somewhat high risk tolerance and be investing mostly in stocks. Again, it depends on the individual and it can vary.

Given the above to assumptions, which actually mirrors myself and many readers I suspect, I think a reasonable return is 8% to 10% per year. If you compound it, you will see that your money doubles every 10 years. Actually, it will double roughly every 9 years if you go with 8% and roughly 7 years if you earn 10% per year. However, 10 years is an easier number to visualize (it's basically a decade)—I am following John Maynard Keynes' suggestion to be approximately right than precisely wrong.

Since you are investing for 30 years, your savings will double 3 times.

Sample Numbers

So, if you start with $10,000 in year 1, it will double 3 times in 30 years: 10k->20k->40k->80k. In 30 years, you will end up with $80,000.

If you start with, say, $100,000 in year 1, it'll be: $100k->$200k->$400k->$800k.

These numbers are not adjusted for inflation so the $800k in 30 years might be something like $600k now. (Inflation is historically 3% per year but it is far easier to hedge against inflation now than in the past. Most businesses even rely on business models that hedge against inflation. Therefore, the contrarian in me says that everyone will be vulnerable to deflation in the long run.)


I think the second scenario is roughly how most of us, who do not have high-end jobs, will end up. The numbers may vary slightly but that's kind of how I expect myself to end up. You won't be rich but you won't be poor either. You'll basically be middle-class (but not upper middle-class.)


How About The Starting Value?

As we saw in the gold vs stocks post, the starting value makes a huge difference in any performance analysis. The same is true here.

Is it fair to assume that someone starts with a high amount, $100k, in year 1? In practice, it is unlikely that a young person (unless they had a good job or were wealthy) would have $100k to throw around on the stock market but I don't think it matters in the grand scheme of things. I am looking at case of a lump sum at the start but even we look at the realistic case of someone saving a little bit every year, you will get close to these numbers. Also, don't forget that I'm starting when someone is 30 years old. It is possible they have saved a few thousand every year in their 20's.

The important point to note is that saving early matters a great deal! (I have an upcoming post on the starting value, which is a very important point for newbies to understand.)

How Accurate Is This?

What I have described is a very rough way of thinking. It is not accurate at all. I am trying to be conservative and point out a somewhat pessimistic outcome so that one can think about their distant life. I actually think most people will end up with higher dollar amounts in the end than what I mentioned above for several reasons.

What I mentioned is a case of someone investing a lump sum and leaving it in the stock market. It is far more likely that someone will save a little bit every year for the rest of their life. If someone were adding a small amount every year, the final savings will be much higher (depends on details.) I am not considering this scenario, which is basically dollar-cost-averaging, because it is complicated and is sensitive to the savings rate (I have a future post coming up illustrating how dollar-cost-averaging, or saving continuously, produces different results.) In an ideal world, everyone should be saving as much as they can, without jeopardizing the life they want to lead.

What If You Are Bearish?

Some of the greater bears, Grizzlies and Polar Bears, may wonder if the stock market return assumption makes sense. Many macro investors I respect actually think 8% to 10% is a high limit for stocks and we may post much lower returns. Indeed, I am skeptical that we will post over 8% per year for the next decade.

However, a macro outlook doesn't impact the idea I am presenting here. In the very long run (we are looking at 30 years here), bear markets are offset by bull markets. American stocks have gone through depressions, world wars, and many other calamitous events and still posted around 10% per year. Interest rates were higher in the past and so were tax rates. Other developed markets, like Britain and Canada, have also posted similar returns.

There are obviously some exceptions such as Japan but one has to invest at the peak for returns to be low. If you do invest near peak, your returns will be lower (possibly even negative). However, the stock market is usually not (wildly) overvalued (except around 2000) so I think one's portfolio will indeed double three times over the next 30 years.