The Dog Years of Investing

Many people read a bunch of blogs on investing and think they have it pat, right?  Even without a detailed analysis on indexing vs. dividend growth, the prescription sounds simple enough:

a) Save money

b) Buy a low cost stock index fund

c) Repeat steps a and b till you make serious bank and then retire.

Except that it ain’t that simple!

Everybody speaks about the benefit of compound interest.  Sure, Einstein might even have called it the 8th wonder of the world.  But nobody tells you that you suffer long years for it.  An inordinate length of time when it seems you are doing the heavy lifting and your portfolio looks like a dud that just barely moves forward.

Welcome to the dog years of investing!   This is the hard part not many talk about.

Compounding is a slow friend

Wish compounding was like magic beans.

Imagine either an equity index fund or a diversified dividend stock portfolio generating a total return of 8% per year, compounded monthly.  

Dividends are part of the total returns, so for the purpose of this article, I am not separating out between dividends and capital gains.  We will assume all dividends are re-invested. 

You, a diligent investor, put in $125 a month faithfully into the fund. Or you buy a good dividend stock every few months.  I chose a low monthly savings figure because that’s closer to the reality of what many people are able to sock away.  

Magically, but for the sake of simplicity, we will assume the returns are a precise 8% year-over-year.  Obviously, this is not going to happen as real returns have a wide range (standard deviation, if you want to get technical).  However, the overall returns in equities average around this 8% annual figure over long periods, so this is not a bad assumption to make.

Despite all this, it is still a very difficult journey.

The chart from Atlantic Financial shows this example, along with 10% and 6% return cases, for reference.

Oh, the pain of compounding.

Take the black line (8%), which is the case we are talking about.  As a diligent saver, putting in $125 month-after-month, gets you to only about $25,000 after 10 looooong years.   This is even assuming a steady march of progress in market returns, with no bear markets to drag down the value in-between.  Severe bear markets in early years can demotivate many people and they get off the investing train.  

After 15 years of investing and the steady 8% returns, your portfolio is struggling to even reach $50,000.   Fifteen years of toil!  Regular, diligent savings of $125 per month gets you, at best, a down payment on a home.   By now, you have invested a total of $22,500 over the 15 year period, and you end up with a portfolio barely twice your total investment after 15 years.  

You can use a different monthly savings figure to proportionally scale the portfolio value after 10 and 15 years.   With a barely $45K nest egg after 15 years, you will wonder, even the famous 4% rule gets you to a monthly income of only $150.   With that kind of withdrawal, you can pay for your phone, internet and netflix subscriptions or a utility bill at best.  

You may wonder what happened to the promised land in compounding?

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

Notice what happens beyond the 15 year period on the black line.   In just 5 years, your portfolio crosses $75,000, which is more than 50% of what you had after 15 years of investing!   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!

In 10 more years, you cross $125,000, which is 6 times what you had after the first 10 years.  At the end of the 30-year investing cycle, you end up with a little shy of $200,000.

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!


Late bloomer, eh?

The biggest takeaway for anyone from this article should be patience.  

This is what Charlie Munger calls assiduity (the ability to sit on your ass and do nothing!).   Buffett has called this type of long-term investing as watching paint dry.  

In other words, don’t expect short-term excitement here.  Get your kicks on Route 66, but not on the route to your retirement!  

Finally, I leave with you a timeless message from a wise one in Star Wars.


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31 comments on “The Dog Years of Investing”

  1. Pingback: Rockstar Rumble, Round 3, Posts 17-24 - Rockstar Finance

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  3. By Angela @ Tread Lightly Retire Early

    I think this is what’s missing in a lot of conversations about the folks that retire in their 30s. Many of them didn’t realize where they were headed until the last 3-5 years of the journey, but had been saving diligently, so they got to miss the paint drying stage and jump right to the big gains. Also, I’d never seen that Buffett chart before. Fascinating.

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  5. By ZJ Thorne

    This right here is why I am so grateful to read other people’s blogs about their journeys. Seeing their results while I’m dinkering around with sub-$20,000 is helpful with motivation. I use the spreadsheets folk recommend, but they don’t feel real. Seeing Ms. X live through it does.
    ZJ Thorne recently posted…Net Worth Week 63 – “Stable” Employment EditionMy Profile

    • By TFRadmin

      They are no different than a stock index when it comes to long term returns. I mention this in the article. Thanks for stopping by Jared.

    • By TFRadmin

      With a name like Compound Your Freedom, you obviously get it! Glad to hear you are seeing the benefits, high savings rate make a big difference. Thanks for your comment.

  6. By Mrs. Simpliy Financially Free

    So true! My husband has been investing for almost 20 years and I have for about 13 and I feel like the past few years, and especially the past year, we have really seen the magic of it. I keep encouraging friends to invest more now instead of waiting because more time = more magic.

    • By TFRadmin

      Thanks for your comment SFF. Glad you are out of the ‘dog years’ phase of compounding.

  7. By Mrs. ETT

    Boy, that’s a visual kick in the guts for those of us starting late. Guess it is as ERN states, we have to mostly rely on whatever we can save. Still, a doubling of the portfolio after 15 years is WAY better than nothing. Mrs. & Mr. ETT – Year 1 investors!

    • By TFRadmin

      Don’t worry, we all started like this one day wondering if we will be able to climb the compounding hill. Good for you that you started, many don’t even take the first step. Thanks for your comment ETT.

  8. By DivHut

    Staying the course is very difficult for most especially when the price is decades and decades away. That’s an interesting graph about Buffett’s net worth and paints a classic compounding picture. The hard part, of course, is plodding through, day in and day out till those returns really start flying. Great quote, “…sit on your ass and do nothing!” So true.
    DivHut recently posted…Dividend Income Update April 2017My Profile

  9. By Jacq

    That’s why if I had a time machine, or message for my younger self it would be to start investing in a Roth when I had my first retail jobs.
    ‘If you want to sit in the shade the best time to plant a tree was 20 years ago. The second best time is now.”
    Now that I know, I’m working to stay on top of my investing. 🙂 I am very impatient with some things, but saving for later has never been one of them. 🙂

  10. By Ms. Montana

    Our first decade felt SLOW. It was good we had low expectations! Now at 15 years things are starting to pick up and it’s kind of fun. 🙂

  11. By Mrs. Groovy

    Great post and a great reminder about having patience. Compound interest is wonderful but it’s not magic. Wouldn’t you think most people can shoot for upping their investment amount on a yearly basis? It sure is easier to stay incentified when the bucket of money is larger, even if the growth is still slow going.
    Mrs. Groovy recently posted…$425 for Dirty Jeans?! Are You Sh*tting Me?My Profile

    • By TFRadmin

      True Mrs. Groovy. Setting more aside is the only way to keep it going for long, especially in the early stages.

  12. By Dave

    Thanks for the reminder on being patient. During down periods, do not quit 5 minutes before the power of compounding kicks in.

  13. By Michael @ Financially Alert

    Excellent reminder, Mr. TFR! Compounding is a long game that’s tough to see up front sometimes. Even after seeing the projections, it still takes some faith to continue executing consistently. The good thing is instead of watching the paint dry, it’s fun to take little side investments that won’t break the bank, but will keep you interested.
    Michael @ Financially Alert recently posted…Are You Getting Paid What You Are Worth?My Profile

    • By TFRadmin

      Thanks FTF. This message is important for all investors but especially for those in early stages of their FIRE journey.

  14. By ambertree

    Great reminder on Hat it takes to see results. Assiduity is a great term for that!

    My route 66 is an option portfolio. It gives me plenty of excitement so that the core remains untouched.
    ambertree recently posted…2 cars is frugalMy Profile

    • By TFRadmin

      Thanks Ambertree. I stay far away from options. After I retire, maybe I can consider writing covered calls on select positions I own, but that’s the max I am willing to enter in options!

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