Net Worth Breakdown: Saved Income vs. Investment Returns 2004-2014

I’ve talked about the importance of savings rate, but remember that investing that savings prudently is also part of the process. Here’s a question – What percentage of your current net worth is saved income, and what is investment growth? This can be a tricky question, as most people invest their money gradually over time and only look at the total balance on their statements. However, as times go by your investment growth should be significant.

For example, I spent the first few years of working paying down my $30,000 in student loans. I finally started investing in 2004, which means I have been regularly saving for about 10 years now. As a rough proxy for my portfolio, I will use the Vanguard LifeStrategy Growth Fund (VASGX) which holds a static 80% stock and 20% bond portfolio consisting of diversified, low-cost index funds. It’s pretty darn close, especially considering all the options out there.

The 10-year historical return of VASGX is roughly 7.03%. Put another way, $100,000 invested back in 1/1/2004 would be $205,497 today. But I didn’t invest all my money at once, I had to wait for each paycheck or any side business profit to come in first.

vasgx2004

A better simulation would be investing $10,000 each year from 2004 to 2013, for a total of $100,000 spread out over that decade. I don’t have any fancy software that will run the numbers for me, so I made a rough estimate using VASGX and Morningstar’s handy-dandy “Growth of $10k” charts. I calculate that:

$10,000 invested on 1/1/2004 would be $20,550 as of 7/5/2014.
$10,000 invested on 1/1/2005 would be $18,254 as of 7/5/2014.
$10,000 invested on 1/1/2006 would be $17,078 as of 7/5/2014.
$10,000 invested on 1/1/2007 would be $14,706 as of 7/5/2014.
$10,000 invested on 1/1/2008 would be $13,686 as of 7/5/2014.
$10,000 invested on 1/1/2009 would be $20,861 as of 7/5/2014.
$10,000 invested on 1/1/2010 would be $16,689 as of 7/5/2014.
$10,000 invested on 1/1/2011 would be $14,505 as of 7/5/2014.
$10,000 invested on 1/1/2012 would be $14,843 as of 7/5/2014.
$10,000 invested on 1/1/2013 would be $12,977 as of 7/5/2014.

As you can see, investment returns varied widely based on initial investment date. $10,000 invested in 2008 did only slightly better than $10,000 invested in 2013. However the total present value is now $164,149. So those ten investments of $10,000 would only be $100,000 if stuck under my mattress, but is now worth over $160,000. I calculated the internal rate of return as 8.1%.

My actual contributions were higher and not quite as constant, but it remains that roughly 60% of my portfolio size today is from saved income, and 40% is from investment growth.* This was not a product of honed skill, excellent timing, or high intelligence. It was just saving regularly, investing in low-cost diversified funds, and not panicking.

This reminds me of this Jack Bogle quote:

Own the stock market, own the bond market, as modified to meet your needs, and don’t peek. One of the greatest rules for investing ever made. [...] Don’t even peek at your account; don’t open those 401(k) statements. If you don’t look at your 401(k) statement–this sounds outrageous, but it’s true–for 45 years … you start when you’re 20 and you don’t open a single statement for the next 45 years, when you open that statement the day you retire, you are going to go into a dead faint of amazement about how much money you’ve accumulated.

The hardest part of investing is not doing anything stupid.

To summarize, looking back on my last 10 years, I must say that both savings rate and investment return are important. If I didn’t save, I wouldn’t have anything to invest. But if I didn’t invest it prudently, I’d also have a lot less than I do now. Start as soon as possible, learn about investing basics, learn about managing risk and emotions, and the combination will be quite powerful over time.

* Side note: I ran the numbers the same way for Vanguard LifeStrategy Moderate Growth Fund (VSMGX) which is a static 60% stocks and 40% bonds, and the results were still very similar. My $100,000 spread out over the last 10 years would have grown to $156,000, working out to 36% of the final portfolio being investment gains.

Comments

  1. Deltaflaze says:

    This is really relevant to me today. I’m 25 years old. I have a 401k from my last job between 20-24 that has a nice surprise in it already, but my current job is giving me a pension that is 19% of my annual salary (which is six figures). Since I had this big pension and was no long contributing to any other retirement, I had a big chunk of change in my checking account and didn’t know what to do with it. I decided to begin investing it just last week so that I didn’t have so much money sitting in a checking account. I obviously started my first Roth IRA (which I have no idea why I didn’t start before besides naivety). My father is recommending dollar cost averaging; I’m more or less deciding to do a greater split instead between stocks and bonds so that at least I’m getting something and then maybe diversify that split as I move forward.

    Been following this blog close to it’s inception and just started this Vanguard account last week. Kinda neat how relevant this post was today :P. I just have to know that this money is meant for a little longer term like 5-10 years out, it’s not meant for tomorrow and that I shouldn’t look at it everyday. It’s really hard not to…I guess I’m too used to my checking account where I had such a huge chunk of permanent change that wasn’t growing or shrinking. Hopefully I get used to that change!

  2. This is also a good illustration of how investing a lump sum at the beginning of a period instead of DCA will yield a better return! I think Vanguard says a lump sum is better 2/3 of the time? I am still wary of the market being overvalued, so have been using DCA, but this helps reinforce that concept. I’m becoming much more tempted to invest dollars as soon as they are available (and for example max out my Roth in January and up my 401k contribution %).

    • Yup, as long as the markets varies but goes up on the whole, lump-sum will be better. But really, I hope to show the difference isn’t that great if it makes you feel better about investing. DCA is better than doing nothing.

  3. I’ve been investing for a similar time period with TIAA-CREF. When you log into your account there, the front page has your account balance and your life-to-date contributions. This morning’s snapshot: contributions account for 61%, investment growth for 39%.

    • That is a neat feature, thanks for sharing. Vanguard provides your investment growth, but only for the last 5 years. That and my Vanguard account isn’t necessarily representative of my entire portfolio as I have other accounts.

  4. Jonathan – thanks again for all that you do (and have done over the years). I started reading your blog in 2005 and have followed it ever since. I feel like we’ve really gone through life together (I’m also married, 30s, have kids, started investing about the same time, etc). Only one income in my family and less than yours, but it’s neat to see your trajectory has been very proportional to mine.

    Your links to credit cards with good bonuses is what got me hooked on FT and credit card games, due in large part to you I’ve been making out Roth IRA for the last few years and making good 401k contributions, finding out mortgage rates were really low and refinanced (a few times!) to take advantage of better rates, etc.

    Thanks for sharing all of your knowledge as you’re learning and going through life.

  5. Kaptain Insano says:

    This is a pointless post. Historical returns are not indicative of future returns and therefore not relevant for anyone or any investment strategy.

    • I agree with your overall point, but the only thing we have to go on is the past in that we have to choose the proper things to invest in. Why do people invest in stocks or real estate at all? Why not just buy gumballs or old books? Buying shares of businesses has done well in the past. Will that carry into the future? Yes, I think that businesses trying to create value in our regulated capitalist system will continue to create real returns above inflation over the long run. Will buying stocks only on Tuesday where last year’s Super Bowl winner played a home game the previous Sunday continue to work? Probably not.

      This is a 10-year lookback. I hope to be around to do a 20-year lookback.

      • Kaptain Insano says:

        Looking at the past for proper things to invest in is a terrible idea. People invest in stocks because they believe businesses will generate a return above their cost of capital in the future. Similarly, people invest in real estate for future dividends and capital gains. People don’t invest in gumballs because there are plenty of gumballs and no reason for there to be any price appreciation in the future. I disagree about your comment on old books too. I’m sure the people that own a Gutenberg Bible have seen appreciation in their investment.

        I like your posts on credit cards and deals, but your financial analysis is questionable at best.

        • But why should one expect real estate to provide future dividends or growth, if not based on a combination of looking backwards and forward? Does it not matter that real estate has talked about since the Bible you mentioned or the Talmud? Looking backward isn’t adequate on its own, but the idea that people should never look backward seems unrealistic. I don’t think we are necessarily so far apart.

          • Kaptain Insano says:

            One reason someone may want to invest in real estate is because there is a limited supply of land and population is projected to grow, increasing demand. That view has nothing to do with the past.

          • Well I guess we’ll have to agree to disagree on the never considering the past thing. But I do want to clarify that choosing any particular investment because of the trailing 10-year returns is indeed a bad move. I could have chosen a different 10-year period and things would have been worse (or better). My goal was really to (1) show some real world numbers based on real world choices as that is my thing and (2) express that my relative return could have been worse, much worse if I had panicked in 2008 and 2009 like many people did and switched to cash. Market timing is exceedingly hard to do. This is based on past (that word again!) data and I’m sure there are some forward-looking reasons as well.

          • @Kaptain Insano: How do you predict that the population is going to grow without analyzing past data?

  6. SO, then, perhaps better for 20-somethings to do a lump sum of whatever they were going to use to purchase a house towards a stock market, instead? Stave off that house purchase until your mid 30s? Heck, I’d argue don’t buy a house until your stock investments have started some nice compounding! Home prices still about the same around here as they were almost 10 years ago when you factor in the costs of maintenance, materials, furniture ,etc.

  7. As usual I was not as analytical as Jonathan, but I compare my net worth to historical wage income which is available on the annual social security statements. The eye opener for me was when I realized my investment balance was greater than all my historical wage income combined which implies significant contribution from compounding of investment income. I think this is another advantage of an income approach to investing. Market multiples expand and contract far more rapidly than cash flow, but the power of compounding is constant.

  8. Kaptain Insano says:

    @mb

    I can’t tell if your question was serious or not but in case it is, here are a couple of examples.

    -The Bakkan area is experiencing an economic boom right now because of shale oil drilling. This economic boom will attract people to the area, increasing the population in the area. There hasn’t been enough housing to absorb the sudden increase in people and therefore, property prices will rise.
    If you had just looked at past data, you would never come to this conclusion. You can also take a view on if shale oil boom will last which would likely impact population.

    -Replacement level fertility rate is around 2.1 children per woman. In many developed countries, that number is below 2, which implies population decrease and in developing countries, it is significantly above 2, implying population increase. In the U.S., one could have a view that fertility rates will stay higher than other developed nations because of immigration from developing Latin American countries. In Europe, where there are more restrictive immigration policies, one could view that fertility rates will decline.

    Obviously, neither example contains all the variables for population change but neither of these examples require any knowledge of the past either. In fact, looking at the past could have driven you to the totally wrong conclusion.

    • I was quite serious, of course. Even in these examples you are still using historical data. For example, fertility level is an average over the last so many years. You are also assuming that the more restrictive European immigration laws (actually, is it really true?) will stay that way in the near future. How can you possibly assert that without looking at historical precedents?

      Frankly, in my opinion, it is pretty much impossible to predict anything about the future, unless you assume some sort of continuity with the past.

  9. Kaptain Insano says:

    @mb,

    I think what you are describing is called recency bias.

    http://www.skepdic.com/recencybias.html

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