Author Topic: Wheres the heel in my net worth curve?  (Read 5656 times)

frugal_engineer

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Wheres the heel in my net worth curve?
« on: August 29, 2014, 06:14:16 AM »
How long did it take you to start seeing the exponential growth in your net worth? 

Attached is a mint NW screenshot for the past 3 years, and the increase is nice and linear with an R^2 value of 0.99 (after fixing those mint-dropouts on the graph from student loan servicer changes, 401k rollover, etc). 

Not looking very exponential to me!  When do I get to the nice compounding exponential curve?

PloddingInsight

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Re: Wheres the heel in my net worth curve?
« Reply #1 on: August 29, 2014, 06:33:31 AM »
What is a reasonable estimate of your investment returns as a %?  (Depends on your asset allocation, but 10% might be reasonable if you are in all stocks.)  What does that come out to in dollars today?  When that number is quite a bit bigger than what you save in a year, you will (IN THEORY) see an exponential curve.  I say "in theory" because of course stock returns don't resemble an exponential curve unless you're looking at many decades.  What you see if you look at only 20 years or less is random variation.

Heart of Tin

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Re: Wheres the heel in my net worth curve?
« Reply #2 on: August 29, 2014, 06:49:35 AM »
I've only been investing since 2011, so I already see an exponential curve. It helps when the market is on a big upswing, and you don't have much invested yet.

wwweb

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Re: Wheres the heel in my net worth curve?
« Reply #3 on: August 29, 2014, 07:21:17 AM »
Just looking rough order of magnitude, you should start seeing exponential behavior when your expected investment gains (say 8% of portfolio values) are greater than your annual contribution - for most people about 10 years.

If you want a more mathematical answer, the exponential function is very well approximated by a line until a*t > 1 where a is the rate of return and t is the time.  For an 8% market return, this works out to about 10 years.   If you've taken calculus take a look at the Tayor expansion for e^(at) about the point t=0 and you'll see why this is true.


Also, there is a tremendous amount of noise in the stock market.  In general, it takes at least 10 years, but often longer, to see clear trends in the data.  Try using the index view tool MMM posted earlier this week with a 5 year window - you'll see many periods where a line fits the data just as well as an exponential.  With a 30 year window, the exponential nature of growth is obvious.

matchewed

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Re: Wheres the heel in my net worth curve?
« Reply #4 on: August 29, 2014, 07:37:32 AM »
You're only looking at three years worth of monthly data. You won't be seeing much exponential action in that small of a data set. For exponential stock market affects I would look minimally at five years but would much more expect out of >10 years of consistent investing.

Also export and graph the actual net worth rather than the confusing graph that Mint shows. The black dots will represent a "closer" to exponential action.

former player

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Re: Wheres the heel in my net worth curve?
« Reply #5 on: August 29, 2014, 09:12:14 AM »
Good job on paying off the debt.  Now that the debt is almost gone and the graph will be all about the investing, you've lost the anchor keeping you in one place.  Chances of exponential growth much improved!

arebelspy

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Re: Wheres the heel in my net worth curve?
« Reply #6 on: August 29, 2014, 10:27:37 AM »
You're only looking at three years worth of monthly data. You won't be seeing much exponential action in that small of a data set. For exponential stock market affects I would look minimally at five years but would much more expect out of >10 years of consistent investing.

Also export and graph the actual net worth rather than the confusing graph that Mint shows. The black dots will represent a "closer" to exponential action.

I would say it's less the time than the amount invested*.  When the amount you put in dwarfs your gains, it will look linear.  When you get a large amount invested so that your gains start compounding on top of your contributions, it will start to look exponential.



*Of course, it takes time to get to a large amount invested.  ;)
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arebelspy

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Re: Wheres the heel in my net worth curve?
« Reply #7 on: August 29, 2014, 10:34:52 AM »
Also linear isn't necessarily all that bad. The jump skews things, but if you cover up the right half and just look at the left half of my attached graph (before the Spring '13 jump), it appears linear.  And if you cover up the left half and just look at the right half (after the jump), it's also linear (though at a much higher slope).

Slow and steady wins the race, and linear progress is better than no progress or backwards progress.

EDIT: Typo.
« Last Edit: September 29, 2014, 09:37:32 AM by arebelspy »
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

matchewed

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Re: Wheres the heel in my net worth curve?
« Reply #8 on: August 29, 2014, 11:35:27 AM »
You're only looking at three years worth of monthly data. You won't be seeing much exponential action in that small of a data set. For exponential stock market affects I would look minimally at five years but would much more expect out of >10 years of consistent investing.

Also export and graph the actual net worth rather than the confusing graph that Mint shows. The black dots will represent a "closer" to exponential action.

I would say it's less the time than the amount invested*.  When the amount you put in dwarfs your gains, it will look linear.  When you get a large amount invested so that your gains start compounding on top of your contributions, it will start to look exponential.



*Of course, it takes time to get to a large amount invested.  ;)

True relatively flat amounts contributed would just look like a linear graph. Then add in gains over a longer time frame with those consistent flatish contributions and you'll see exponential action.

catccc

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Re: Wheres the heel in my net worth curve?
« Reply #9 on: September 28, 2014, 10:01:20 PM »
Like arebelspy, mine looks mostly linear, but if you look at the slope of the 1st half of the graph v. the slope of the 2nd half of the graph, it is a tad steeper.  So I guess I'm still waiting for it to suddenly shoot to the sky.  Or for the graph to show 50 percent more time, and show another essentially linear, but steeper slope for some number of years in the future...

This graph covers about 7 years.

also this is the first time I'm attaching something to a post.  Hope it works.

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Re: Wheres the heel in my net worth curve?
« Reply #10 on: September 29, 2014, 08:42:20 AM »
I was able to see a pretty good curve on my accounts (11 years), but as a Mustachian, you may never see the steepest part of the potential curve, because you will retire before it happens.  What blew my mind was just how flat the first 5 years were.  I took a bit of a break around 7-8 years to live it up a little and the curve did flatten out somewhat, but growth was still good thanks to my asset base continuing to grow.   

Malaysia41

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Re: Wheres the heel in my net worth curve?
« Reply #11 on: September 29, 2014, 08:46:53 AM »
the knee is approx when your money first doubles - rule of 72.

DrJohn

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Re: Wheres the heel in my net worth curve?
« Reply #12 on: September 29, 2014, 08:48:00 AM »
Maybe project using out a chart in a spreadsheet, where you want to be with constant contributions and x returns and you might find the results quite encouraging/pleasantly surprising....

ender

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Re: Wheres the heel in my net worth curve?
« Reply #13 on: September 29, 2014, 09:09:33 AM »
Think of it this way. If you have, say $100k in investments, if you get 8% return and contribute a full 401k you are basically adding 2x as much yourself as you are investment earnings. So it will not look very exponential.

But if you have $300k invested every year your investment returns at 8% are more than your contributions so it will look even more exponential.

The big factor here is the ratio between your contributions and earnings.

nereo

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Re: Wheres the heel in my net worth curve?
« Reply #14 on: September 29, 2014, 09:20:26 AM »
Just looking rough order of magnitude, you should start seeing exponential behavior when your expected investment gains (say 8% of portfolio values) are greater than your annual contribution - for most people about 10 years.

If you want a more mathematical answer, the exponential function is very well approximated by a line until a*t > 1 where a is the rate of return and t is the time.  For an 8% market return, this works out to about 10 years.   If you've taken calculus take a look at the Tayor expansion for e^(at) about the point t=0 and you'll see why this is true.


Also, there is a tremendous amount of noise in the stock market.  In general, it takes at least 10 years, but often longer, to see clear trends in the data.  Try using the index view tool MMM posted earlier this week with a 5 year window - you'll see many periods where a line fits the data just as well as an exponential.  With a 30 year window, the exponential nature of growth is obvious.
+1 (!)  This is the best answer I've read to this type of question in a long time.
I'll add that for my own personal encouragement I plot the gains I earn every year.  This adjusts for the enormous effect that early contributions have on portfolio growth.  Admittedly this is a 'feel-good' exercise but for me the encouragement is worth it.