Let’s kick off today’s post with a very simple concept.
Assume you are 21 years old. Wise beyond your years (and certainly wiser than I was at that age!), you kick off your investing journey.
You start by contributing $500 a month into a low-cost, diversified index tracker. And then… you just keep it up for the next 40 years.
Nice and simple – and it leaves you with a cool $1.7m in the bank by the time you hit 60:
Boom! To say you’ve won the investing game would be an understatement.
You started early, stayed the course, and didn’t get distracted. In total, you’ve contributed $240k and your money grew by 7x over the course of four decades.
Here’s the interesting bit though. Sure, you may be sitting on $1.7m – but what are the components of that pot?
In other words, how much of the $1.7m is comprised of the contributions you were making in your twenties – versus let’s say in your forties?
Let’s have a look at the chart below:
This is the same chart as the first one in today’s post. However, the various colours show the value of contributions you were making at various ages.
For convenience, I’ve broken your 40-year investing horizon in five-year blocks.
Every five years, you contributed $30k. Thus, the orange area of the chart shows the value of the contributions you were making between 21 and 25. The grey chart – the value of your contributions between 25 and 30 and so forth.
Well, guess what? The $30k you contributed between 21 and 25 ultimately grew to a whopping $560k, an 18.7x return. The next $30k grew to $382k, a 12.7x return.
And the next 30k grew to $260k. Still respectable, but not nearly as impactful as the investments you made in your 20s.
I could keep going, but… it’s kind of pointless.
As you can see from the chart, the money you’ve invested in the first 15 years has done all the heavy lifting in your portfolio. That $90k you’ve socked away grew to about $1.2m – roughly 72% of the pot you’ve accumulated by 60.
You can see this visually as the contributions you make after 35 become progressively smaller slivers of the chart. In fact, the money you are socking away in your 50s hardly makes a difference.
Here’s another way of looking at it:
In each five-year “block”, you contribute $30k. But the ultimate value of that $30k just keeps declining given you don’t get to benefit from compounding.
Wait, you’ll say. That’s just NOT how life works.
I mean, who has $500 a month to contribute at 21? And if you do, what’s the point of socking that money away?
You’ve got to live a little bit! Investing can wait until you make the big bucks in your 30s and 40s.
Sure, I won’t argue with you – not least because that’s exactly what I thought in my 20s. The more money you make, the easier it is to save money.
So let’s re-run the analysis above, but with one important change:
Every five years, you increase your contribution amount by 25%.
Thus, at 26 you increase your contribution from $500 to $625. And at 30, you jack it up again to $781 and so forth.
Here’s what happens.
Most importantly, the overall value of your pot will jump significantly. By the time you turn 60, you will have a portfolio worth $2.7m – a cool million more than you would otherwise.
And here’s how it looks broken down by “age bracket”:
That money you contributed between 21 and 25? Well, it still grew to $560k, representing 21% of your total portfolio. Not bad for a $30k investment…
And the $114k you’ve contributed between 21 and 35? That would be $1.45m – still more than half of the portfolio you will ultimately end up with.
It’s an eyewatering chart.
Having just turned 40 myself, it’s sobering to think that whatever I do from here onwards will have an ever-declining impact versus the contributions I have already made.
The point, of course is NOT to throw the towel in.
If you’ve got zilch saved up today, the savings you will make from here onwards will account for 100% of your future portfolio. But you better get on with it – and quickly.
And if you are lucky enough to be in your twenties and reading this, you should appreciate the sheer magnitude of the opportunity in front of you.
You are in the right place, at the right time.
Finally, if you happen to know someone in their twenties or early thirties, please forward them this post and the chart above.
It may well be the most important one they will see in their investing lifetime.
As always, thank you for reading – and happy investing!
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Banker On FIRE is an M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.
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20 thoughts on “The Most Important Chart In Investing”
Great post, crystal clear and so impactful. Being based in Ireland the only tax break we get on saving and investments is our pension contributions. I’m encouraging my younger cousins and friends to take their pension saving seriously and these charts are a brilliant way to show the impact of early extra pension contributions. I understand it’s hard to get excited about pensions as it’s associated with retirement and money locked away for 30-40+ years but as I say it’s the smartest way for us to get the biggest bang for our buck!
I once calculated that the tax break and employer matching takes the returns on workplace pensions well into the teens
In other words, the kinds of returns many hedge funds and private equity firms struggle to deliver (at least consistently):
Thanks for another good post. Are you able to explain time in the market because I am a late investor. If a fund cost £50 per unit last March and the price goes up to £80 per unit now is it still worth investing when the price per unit has risen so much? Thanks
Tough question in isolation but ultimately, the answer is yes. The unfortunate reality is that in investing, you are nearly ALWAYS buying at the top of the market – simply because the market keeps going up all the time…
You can wait for a crash but historically, that has proven to be a bad idea.
Amazing. I always knew this graph was coated somewhere, but I am too inept to make it myself. I’m most grateful for this and will pass it on.
Cheers Alex, took some tinkering with the excel but I got there in the end!
Silent but reflected reader (40ies), but this time I had to comment: Wow, what an impressive visualization! I already forwarded a lot of your posts, but this will go straight to my below 40 “mentees”!
Keep up the clear way of lighting from different angles the ever so important finance and FI topics! Just loving it.
Thanks for the kind words – very glad you are finding the blog helpful!
I really like these charts and how you broke down the data.
Really highlights the importance of ‘time in the market’ vs. any sort of short-term optimizations.
That said, I’m wondering if as I get older I should DCA more of my cash flow into riskier things over time due to the diminishing returns I’ll get if I were to keep putting the same $X into the same risk portfolio. I guess it’s OK to do so as long as I’m keeping in line with my financial plan and any and all money I put in riskier plays are money that I can just lose and not miss.
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Nice clear visualisation of compounding. I think there may be a hidden assumption here that it stops at retirement. Whereas it still needs to keep on sustaining our retirement for another 20-30 years. The later contributions still have plenty of compounding in them as they support us into our eighties and possibly nineties.
Thank you and yes, agree with you.
That being said, it’s tough enough to get someone in their 20s or 30s to think 30-40 years ahead, let alone 50-70!
Heh, I have the bug and am pondering pension pots that can be passed down the generations as a permanent FIRE fund. Essentially 3% forever! As long as you only have one or maybe two heirs each generation.
Interesting one! One could probably come up with a structure that allows for that, but I’ve got a pretty bearish view on solving all (or a big chunk) of your children’s financial problems for them at the outset.
Kind of takes the fun out of living, doesn’t it?
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Love the blog Banker On Fire! I love charts like these that really break down how critical it is to invest often and as early as you possibly can. I think this will help many young investors. Keep up the great work!
Cheers, glad you enjoyed it!
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