The journey of life is long, complicated and is never a straight path. Same applies to our financial journey as well, as finances mirror our lifestyle and choices. So, we must stay humble and kind.
The elegance of steadily compounding financial returns are merely that…just elegant. It’s funny we model financial portfolio growth using curves like these.
The real curves are very different. Heck, they are not even smooth curves. The real life that we all face and the jagged path our finances take resemble a different path. Despite periodic contributions, my net worth chart resembles like the climb path of a ragged mountain. Thankfully, it’s moving up but it has its periodic dips and valleys corresponding with broader market.
That’s why, it is important to stay humble and kind.
Still, the value of a compounding model curve like the one above is that it reminds you of the dog years of investing, mainly the first 10 years where you must stay invested and keep contributing even as you don’t notice any significant rewards, that is, no real ‘compounding’ of portfolio growth.
Want to see what a real curve looks like? Here’s a snapshot of my net worth journey….without the numbers!
In case you are wondering why there are two curves, the upper one (red) corresponds to my net worth and the lower one (blue) is earmarked retirement assets. Notice the serious dips in late 2008 and also, in the summer of 2015. The first one was of course, the Great Recession. Since the contributions continued throughout the period, the impact wasn’t as strong. However, with substantial market growth since 2009, even a smaller dip in the summer of 2015 caused a bigger impact than my contributions. In other words, your monthly contributions matter less in later stages of your life journey.
An eagle-eyed reader will also notice that while my net worth dipped significantly in the 2008-09 recession, the retirement assets did not suffer much. The reason being is that I was more in bonds/cash then in my retirement accounts whereas the rest of my assets were heavily into stocks. That changed in 2010-12 period where most of my retirement accounts was also moved into equities, especially dividend stocks.
Almost 100% equity allocation is why the dip in 2015 hit both our net worth and retirement assets. Also, I was more in energy stocks then and the year 2015 saw the industry’s worst oil recession in over 3 decades. It took a year for my portfolio to recover even while my investments were continuing. It is painful to see your portfolio decline despite new investments being pumped in. So, I reminded myself to stay humble and kind.
A major inflection point comes, as it did with me, is when your retirement assets cross 25 times your annual expenses. At this point, you are technically financially independent, as you have sufficient assets to retire early as per the 4% rule, though 3.27% (or 30.6 times) would be ultra-conservative. As we have crossed that point but still progressing towards the desired target, the journey continues. There are no guarantees in life even if we reach financial independence, so we must stay humble and kind.
This trend continues till you reach a stage where even your earned income matters less. Usually, it happens when your net worth to earned income crosses a ratio of 15. In other words, if you have 15 times your earned income as your net worth, then even your full-time job income starts to matter less, because all it takes is a 6% return on your assets to match your entire earned income! That’s a real sweet spot to be in.
But always stay humble and kind.
Are you wondering why this persistent message about ‘humble and kind’ in a post about net worth and growing assets? It’s because I have seen what happens to people when their wealth enters their ego. It’s not pretty. I want to stay vigilant.
Besides, in the personal finance blogging world that is primary driven by numbers, sharing financial targets and percentage growth, it is easy to lose sight of the fact that no number, no matter how big or small, defines who you are. Every one of us, no matter how hard we have worked to be here, cannot discount the role good fortune has played. When even Warren Buffett says he has won the genetic lottery, imagine the humility it takes to say it. We have no excuse.
The lesson you should take from this is there is no way you could’ve predicted how your net worth will progress each month or each year. If you had asked me 10 years ago whether I would see this kind of progress, heck if I knew. There is no way I could’ve answered that honestly. The same question now about the coming 10 years will get the same response from me. Heck, if I know. The only thing I can be sure of is the curve will not be exactly the same as it was in the previous decade.
The sensible way to navigate through life’s twists and turns is to always stay humble and kind. Tim McGraw wisely reminds us of that here.