In 1997, the year 2000 seemed very distant, not to mention the year 2017. Now 2000 is already upon us, and seemingly not far behind it looms... 2017. Most of us reading this column have lived considerably longer than 17 years. Perhaps most of us can remember the past 17 years quite clearly, even if we were only 8 years old when they began. Seventeen years goes by quickly, and it is all that remains between us and our $150,000 goal. At the moment, we have only $4,200.
Can we possibly meet our goal? We're already 12.5% into our investment time horizon, meaning only 87.5% of our time remains. Yet, by dollar amount, we are merely 2.8% toward reaching our goal. We have 97.2% of our money to make yet before we reach $150,000.
About 14% of our total monetary goal, or $21,000, will be added to the portfolio automatically over the next 17.5 years via our monthly savings of $100. The rest, or 86%, of our money must be earned on the stock market. That doesn't sound like a small task, does it?
To date, we have earned about $800 with our young investments, or 30%. This is not a bad start. Our annualized return of 11% (as of December 30, 1999) was recently much closer to the 15.5% annualized return that we must achieve to reach our goal, and it could tick back up to 15.5% with relative ease. So, how come we seem so far away from our goal? We have $4,200 compared to a $150,000 goal. How come I feel as if I'm standing on one side of the Grand Canyon and hoping that by 2017 the land moves enough to bring the two sides together?
Well, we're in this position largely because things usually do start slow, and small, and then build; and also largely because most of one's investment return arrives at the tail-end of an investment's time horizon. Most compounding happens at the end, or in the later years, of your investing career. Even if we gained 25% on our portfolio next year, which I'm not predicting to happen but which wouldn't be too unrealistic any year, we wouldn't earn that much money: only about $1,000. We would not be much closer, at all, to our final goal even if we jumped 25% next year.
If, however, 15 years from now our portfolio is worth $100,000 and then we earn 25%, we would tack $25,000 onto our total account value, which is a huge leap toward our objective. In fact, $25,000 is a whole 16.6% of total goal. This is the power of compounding in relation to large numbers. Compounding is simply groovy when you have a small $10,000 portfolio. A 1% gain is $100. But when you have a $100,000 portfolio, compounding goes beyond groovy and becomes ultra-hip: a mere 1% gain on a $100,000 portfolio is a whole thousand bucks.
As your investment base grows, the power of compounding large numbers, even if you're only achieving normal 11% annualized stock market returns, can put you over the proverbial top and into the sweet house.
We appear to be far from our goal right now, on the dawn of 2000. And we will likely appear to be far from it well into the 2010s, too. However, as our investments age (if we've invested well) the power of large compounding numbers is going to push us, like a giant steam train, ever faster toward our goal. In the future we should, on some single days alone, be able to earn much more money on paper than the entire $4,200 that this portfolio is worth right now, just like the Rule Breaker Port, which began with $50,000 and now loses or makes at least that much in single days rather frequently.
We can never stop time, and truly we shouldn't want to, but we can certainly benefit from time by investing smartly. So here's to the year 2000... and to all the years to follow.
Thank you to everyone who has read and contributed to the Drip Port over the past two-and-a-half years. We wish you a very healthy, happy, and prosperous 2000!
For thoughts on the century that just passed and on the century to come, please visit today's Rule Breaker column.
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