Sustainable Net Worth Percentage Gains

[mr_orange]

What compounding net worth percentage do you feel is sustainable?  It seems that growing your net worth should have some sort of logical saturation point as your base of wealth grows.  For instance, it seems logical that making 20% is much easier when you only need to increase from $100k to $120k, but that should be harder to do from $1M to $1.2M and even harder still from $10M to $12M.  The reasoning would be that as your wealth grows:

1.  The places to park money diminish because there are fewer projects that demand that much capital and are willing to pay high rates for capital

2.  People are likely to have marginal propensity to want to grow their wealth past a certain point.  At some point they're content and slaving away for incremental dollars has little utility past some point

I was wondering what people's thoughts are on what a sustainable growth rate in net worth is.  Is 20% up to some number impressive and then it drops to some other number afterwards?  Is 20% too low for initial growth rates?  Where do you figure it stabilizes and what is the general net worth that this occurs?  Are there other barriers here?  Any thoughts?

[MDM]

Seems there are (at least) two components to this growth: earned income and unearned income.  In other words, the income one gets from wages or business profits, vs. the returns one gets from passive investments.  With the former, net worth grows more-or-less linearly (depending on how the underlying wage or business income grows).  With the latter we get the more familiar compound return curve.

Percentage growth when net worth is ~$0 and growth is dominated by earned income is somewhat meaningless.

Percentage growth from unearned income will be driven by market performance in one's investments of choice.

[deborah]

It actually varies. At first, it can be very difficult to get anywhere with your net worth - you need to change a lot of habits, start to believe that saving can happen, get on board with the MMM philosophy and, in some cases that I have seen here, get out of a dicey situation (you have several investment properties and their mortgages are actually pulling you under or you have a very expensive car finance deal). This can mean that your net worth lowers after you start.

Once you start to roll, it can compound quite nicely. There are many people who have added 50% to 70% of their income into their savings each year, so high rates of compounding are quite achievable.

[schimt]

I feel that setting a goal for % increase of net worth is sort of useless. It's handy for planning long term returns, but for year to year, much of the return is based on factors that we cannot control. I prefer to focus on savings rate and set a goal for myself, which is something i can control.

If you use mint, i enjoy looking at the net worth trend grow, but really focus on the Net Income trend page and try to control that month to month to meet my year end goal.

sounds like you may be talking about something more then passive investing through an index mutual fund though.

[Proud Foot]

I am not sure if I completely understand what you are asking.  As long as you are continuing to save your net worth should have gains slightly larger than the gains on your investments. I currently am projecting gains in excess of 100% for 2015 and 2016 as I am paying off debt currently have a slightly negative net worth. I will continue with high percentage gains for several years after. Eventually my net worth percentage gain will diminish to slightly above my investment gains. I use 7% for my projections so in 20 years my projected percentage gains are a little above 7%. As I see it, the only way to get "sustainable" gains would be to invest in fixed income instruments. However these will typically under-perform the market as a whole.

[DoubleDown]

I'm hoping 4-5% real returns are sustainable, and I'm approximately in a 70/30 stocks/bonds split with some real estate on the side. History proves that to be the case, hopefully the future will also.

[EscapeVelocity2020]

Seems there are (at least) two components to this growth: earned income and unearned income.  In other words, the income one gets from wages or business profits, vs. the returns one gets from passive investments.  With the former, net worth grows more-or-less linearly (depending on how the underlying wage or business income grows).  With the letter we get the more familiar compound return curve.

Percentage growth when net worth is ~$0 and growth is dominated by earned income is somewhat meaningless.

Percentage growth from unearned income will be driven by market performance in one's investments of choice.

MDM nailed it.  Early on, when your portfolio is less than 5x annual income, savings has a substantial impact on NW growth.  Eventually, around 10x income, compound growth on the portfolio dominates, and has been ~7% nominal historically.  There is no 'saturation point' on this.

As a simplified example, let's say your income is 100k and you can save 50k.  Up to 500k portfolio, you can see that the 50k savings added to the portfolio is a substantial boost.  Eventually, around 1 million, 50k is less than the 7% you expect (on average) to return on your portfolio. 

Of course, the real world has a few more twists and turns - sequence of returns, asset allocation, inflation / interest rates...  But Thomas Pikety recently put forth the case that r>g (rate of growth on capital has historically been greater than rate of income growth), so, in other words, build up your portfolio and eventually it will take care of you (and your heirs) better than trying to increase your wage income.  It also implies that the rich can indefinitely widen the gap between themselves and the working poor.

[mr_orange]

Yeah....I guess that most folks on the forum are going to be indexers.  7% real returns are very low to me because I invest additional money in our business, which is actively managed. 

Looking at our net worth chart it is pretty linear for about 10 years.  Of late as our business has started taking off it has an inflection point.  Our geometric mean return up until now (11 of 13 years of data....2 lost to home invasion and stolen computer) has been 19.7%.  Even though things seem to be taking off of late the projected geometric mean only moves to about 20.6%.  Thus it seems like it will be hard to keep growing things at this rate without taking on more and more risk. 

[chasesfish]

You're investing additional money into your business, that's acting more like earned income.

It comes back to what MDM said - Early on, you'll have a higher growth rate because a larger % of your net worth gains are from income savings.  Later on, a larger portion comes from changes in marketable investments if that's where you choose to have it.

I save $3,000 - $6,000/mo.  Four years ago I could count on my net worth going up consistently every month/year.  Now I am saving that amount but I can be up $20,000 one month and down $15,000 the next based on a 2-3% move in the overall market. 

Your dealing with three variables:  Earned Income, Savings Rate, and Market Returns.