Note: This post was first published in February 2020 and updated in July 2021
Let’s have some fun with the numbers today.
If you have spent any time reading personal finance articles on the web, you’ve invariably come across a graph that looks like this:
Net Worth Evolution
You, becoming a gazi millionaire
The graph above assumes you start contributing a 1k a month today (in the currency of your choice) and keep on going for the foreseeable future.
Assuming an 8% annualized return, in about 25 years you’ll have a cool million sitting in your investment account.
Nicely done – and provided you started doing so early enough, you are not even 50 yet.
You pack up your bags, wave goodbye to your boss and trade your dusty cubicle for sun, sand and never-ending margaritas.
Ahh, wouldn’t that be nice? No stress, zero anxiety and 20/20 vision into your bright, certain future.
Unfortunately, life just doesn’t work that way. You know it, I know it, all the other personal finance bloggers know it.
So why does everyone keep painting the same pretty picture?
The Allure Of Simplicity
Yes, we all recognize that your path to wealth will look drastically different.
However, here are two big reasons you keep seeing charts like the one above.
Reason #1: No one knows what the future holds
Given the historical performance of the US stock market, an 8% nominal annualized return is a sensible assumption:
However, we haven’t got a clue about how we’ll get to that 8%.
All we know is that there’ll be good years and bad – and they will average out of the time. That’s it.
Reason #2: Simplification
That’s right. No one likes complexity.
Keeping things nice and easy can be very helpful in explaining complex financial concepts like compound interest.
Having said that, what does the real path to wealth look like? Let’s play around with the historical data to find out.
Note: for simplicity, all of the graphs below assume an investment of 1k/month in an S&P 500 index tracker.
The orange line denotes the total value of contributions, the blue line is the total portfolio value.
Case Study 1: Oliver, An Avocado-Loving Millennial
Oliver graduated from university shortly after the financial crisis – and was ballsy brave enough to start investing in the stock market right away.
Oliver’s Net Worth
Eight years later, he has built up a pot of 168k. There were some dodgy moments (in particular towards the end of 2018) but for the most part, it’s been smooth sailing.
Oliver is rewarded with a very nice (and growing) gap between his total contributions and the value of his investments.
Case Study 2: Emma, A Long-time Investor
Emma is old enough to have started investing way back in 1990.
Over the next decade, she invested c.120k in equities.
By the end of 1999 she was sitting on a portfolio of almost $380k – and feeling like a total champ.
Emma’s Net Worth: 1990 – 1999
Then, things went south rather quickly as the US stocks entered one of the worst decades on record.
However, Emma is a smart and persistent cookie, so she kept on investing, even though her gut kept telling her to run for the hills.
I wish I could say her persistence was rewarded, but that would be lying.
Emma’s experience over the next decade has been nothing short of frustrating.
On a couple of occasions (around 2003 and 2008), the value of Emma’s investment pot barely exceeded the grand total of her contributions to date:
Emma’s Net Worth: 1990 – 2019
Somehow, Emma managed to hold her nerve, and ultimately her patience was rewarded in a massive way.
The stock market went on a tear in the decade following the financial crisis.
By the end of 2019, Emma’s portfolio was worth $1.9m and she gets to sail into the sunset.
Good thing she didn’t cash out when things were getting dodgy!
And in case you are interested, this is what would have happened in case Emma increased her contributions by 3% every year (i.e. in line with inflation/salary growth):
Emma’s Net Worth
Small increases over time really add up.
The total value of Emma’s contributions is about 220k higher – but the value of her portfolio goes up about 670k.
The beauty of it, of course, is that increasing your contributions as your salary grows isn’t that hard.
Your savings rate remains the same – and yet you still have more disposable income (in absolute terms).
Case Study 3: Sam, The Unlucky One
Sam really got the short end of the stick. He got into the market at the height of the dot-com bubble.
Thankfully, he ignored the NASDAQ and went for a well-diversified group of US stocks represented by the S&P 500.
This is what Sam’s journey looks like:
Sam’s Net Worth
Unlike Oliver and Emma, Sam actually had to go through something no investor ever wants to experience:
A few times along the way, the value of his portfolio was below the value of his contributions. 2002/2003 and 2008 weren’t happy years for Sam.
But Sam also kept the faith.
He ran the numbers and knows that if you are investing with a long-term horizon in mind (i.e. 10+ years), it’s practically impossible to lose money in the stock market.
So he decided to keep going – and also made out like a bandit over the following decade.
It’s Not Going To Be Pretty…
… and anyone who tells you otherwise is lying.
Along the way, you are bound to experience some real “oh shit” moments.
They are guaranteed to happen. What will determine your success as an investor is your ability to stay the course.
Selling after a correction is the sure way to lose money in the stock market.
Don’t do it.
Recoveries are typically very swift, so as long as you don’t do anything stupid, you won’t lose money.
Remember: there’s never a time when the stock market looks like a good investment.
Things are either “too scary” or “too good to be true”.
It’s scary when there’s blood on the streets.
And it’s scary when prices have been going up for a while – because everyone is predicting a massive correction.
The only way to come out ahead is to get into the game – and stay in it as long as possible.
And the sooner you start, the sooner you’ll get there.
Thank you for reading – and happy investing!