Power of compounding

RYAN By Guest Blogger Ryan Lewenza
.

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

The above quote is attributed to the Nobel Prize winning physicist Albert Einstein. So in addition to developing The Theory of Relativity (you may have heard of it…E=mc2), he also had the brilliance to recognize the incredible power of compounding returns, which is the focus of today’s blog post.

Simply stated, compound returns are just returns on returns, and they help to significantly grow your savings over time. For example, say you invest $10,000 and you earn a 6% annual rate of return over a five year period. At the end of year 1 you’ll have $10,600 with your return being the $600. Then in year 2 you’ll earn another $636 ($10,600 x 1.06), with the $36 representing the compounding returns on the original $600 earned in year 1. In the table below take note of the yearly return column, which increases from $600 in year 1 to $757.49 by year 5. That’s compounding returns at work.

Compound Returns at 6% on $10,000 Investment

Source: Turner Investments

Now the magic of compounding returns, and why Einstein called it the “eighth wonder of the world”, is the earlier you start investing, and the longer you’re able to compound the returns over time, the more exponential the returns become.

In the chart below I calculated an investor saving $1,000/month ($12k/year), earning a 6% return, and starting at age 30 (35 years invested), age 40 (25 years) and age 50 (15 years) to retirement age of 65. The investor who starts saving at 30 years old would have a retirement portfolio at age 65 of $1.43 million. The second investor who starts ten years later at age 40 would see their savings grow to only $696,000. So, in this example, if you start 10 years earlier, which equates to an additional $120,000 of savings, it will result in the portfolio being $700,000 higher at the end due to the power of compounding returns. Finally, an investor who drags their heels and waits till age 50 to begin saving would see their savings grow to just $292,000 by age 65.

As you can see in the analysis the key is starting early, continuously saving, and sticking to the long-term plan so that compounding returns can work for you.

The Power of Compounding

Source: Turner Investments. Assumptions: investor saving $1,000/month ($12k/year), earning a 6% return, and starting at age 30 (35 years invested), age 40 (25 years) and age 50 (15 years) to retirement age of 65

Another interesting way to look at compound returns is to calculate the required monthly savings amount at different ages that will achieve a $1 million portfolio by retirement age of 65.

In the chart below, where we look at different starting ages to invest, lets focus on age 25 and 45. If you want a $1 million portfolio at retirement and start saving at age 25, with the portfolio earning a 6% rate of return, you’ll need to save $499/month or $239,520 in total. Compare that to a person who starts saving at age 45, they will need to save $2,153/month or $516,720 in total till age 65 to realize their goal of $1 million. So here’s the easy question for our readers – would you prefer to save $499/month at age 25 or $2,153/month at age 45 to have a million bucks at retirement? I know which one I would prefer.

Monthly Savings to have $1 million in Retirement

Source: Turner Investments. Assumptions: 6% annual rate of return

In just the last week we saw the S&P 500 hit new highs, followed by a big drop on news that the US/China trade deal could be pushed till after the 2020 election. During these uncertain and volatile times when we’re inundated with so much noise we can lose perspective of what’s really important to investing and realizing our long-term financial goals.

At the end of the day, the two most important factors to successful investing are one’s long-term rate of return and the number of years invested. We get so caught up on which hot stocks to buy, when the next bear market may be coming, how much should we have in equities etc., when the simple truth is it’s about time in the market, rather than timing the markets that will determine whether you realize your financial goals.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.

 

69 comments ↓

#1 crowdedelevatorfartz on 12.07.19 at 11:42 am

Great article ( once again).
I wish I had the fiscal discipline at 25 to start investing, alas I didnt start until 30 and it wasnt 1k/ month.
But I’m slowly getting there……..

#2 Sail Away on 12.07.19 at 12:23 pm

Thanks Ryan. Good stuff.

One thing rarely mentioned is that free cash can become much more available in later years. It’s far easier for me to put away $3k/mo in my 40s than $700/mo at 30.

Luckily, knowing this, we’ve also helped fund our kids’ accounts starting at 18.

#3 akashic record on 12.07.19 at 12:31 pm

Sales at Rolex store in Miami up 400% this year.
Wait list for most models.

The power of compounding.

#4 EJ in YVR on 12.07.19 at 12:35 pm

Thank you for this easy-to-understand and oh-so-vital explanation of the basics of financial health. Blog dogs, share this post with someone, especially your twenty-somethings, who can most benefit from its information, and your older teens, who won’t hear it anywhere else.

#5 Ponzius Pilatus on 12.07.19 at 12:51 pm

There will be no Brinks truck behind my hearse, for sure.
No regrets.

#6 Blog Bunny on 12.07.19 at 1:06 pm

I love you ! The pic of the year :)

#7 DON on 12.07.19 at 1:26 pm

#85 Mattl on 12.06.19 at 10:25 am

#56 DON – what are you rambling about? My point was that you can see the direction the market is moving from the RE Board. Clearly that direction is down, no matter what the release letter says. I don’t see the point in getting all worked up about a CTV FOMO report, or a board release letter when the underlying data is available and easy to interpret.

You have a tendency to quote one small piece of my post and then go on a rant that has nothing to do with what I posted about. I think you believe that I’m a RE pumper – I’m not, we have a small RE position relative to income / net worth.

But great rant on layoffs and median incomes, not sure what that has to do with RE Board stats. Maybe chase some other poster around for a bit?
*****************

“Ranting”, “Rambling”, “tendency to quote”

You forgot my personal Mattl rebuttal ‘Howling at the Moon’. Your debating style is lacking to say the least and juvenile at best.

The point of my initial response was for you to ‘look in the mirror’ with your response on listening to realtors etc, but discounting others as being doomers even when they provide evidence (which you seem to never do).

FOMO reports helped to fuel the market and create the debt situation that we face today.

AND we will all face the consequences to some degree, sooner or later (even if you have a secure job).

The banks layoffs and loan losses show that things are not OK, to say the least. Our economy is on borrowed time and no one is pointing to any green shoots on the horizon.

Your own research shows that sales are slowing.

Once again just so it sticks, we will all be affected by the next recession. But this time Canadians and governments at all levels are walking in with record debt and inflated real estate valuations. Only a matter of time. We are not in the same position as the US, they had their correction.

All I am saying is, take off the blinders and allow new information to challenge your assumptions and prepare your life accordingly. I have seen many stubborn people loose their shirts in recessions because ‘they didn’t see it coming’ (FOMO induced – head in the sand thinking). Looking back even the experts didn’t see the Great Recession coming only the ‘boots on the ground did’, the power of unbiased observations.

If you choose to allow realtors and media distort information so be it. I trust their information will be valuable components of your decision making process in the future. Good luck!

#8 crowdedelevatorfartz on 12.07.19 at 1:29 pm

@#115 CrabbyTown Carli
“to confront the minority government over jobs. More taxes won’t bring them back. Neither will social justice, indigenous rights nor gender equity – as important as they may be.”

+++++
Reconsider what?

If the govt is deficit spending and bankrupting the country, people are broke, out of work, and the unemployment rate is rising.

Who, exactly, will be paying for your beloved, expensive, social experiments?
The beleaguered taxpayer?
Again? and Again? and Again?

Good luck with that.

#9 TurnerNation on 12.07.19 at 1:32 pm

Yup up my tenant insurance just went from $18 month to $28 a month. 55% hike anyone?
If they want to insurance companies can change lives and drive people off property & self sufficiency, say in rural areas to cities. Not like there’s any plans for that though….its not like they are building untold city condos in prep for this..

But muh climate change! When will T2 alter the climate as promised, I’m tired of this cold weather.
“They are ruining my childhood” – as always flip what our elites say 180 deg.
On CBC Kids web site the Hot topics menu top right side, “climate change” is the second topic. What are they doing to these poor kids who should be allowed as kids.
https://www.cbc.ca/kidsnews/
No fun, you must receive Globalist programming from the earliest age. Snitch your parents when they fire up the lawnmower.

#10 Flop... on 12.07.19 at 2:24 pm

So I looked at howmuch to see if I could share anything with ” Figure it out” and “T”

This one’s got a crust on it from early 2018, but if you click on the link I think it’s got some good info on it.

I have relatives in The Bay Area that I have talked about this type of thing before, but the most recent discussion was when I was in Houston for spring break 2019

A guy that reminded me of Tommy Lee Jones, from Atlanta, in town on a business trip, said he was paying roughly $3000 usd a month.

That was before he got drunk in the sun on Budweiser, got stuck in between the pool area and elevator, with no room key to go either way, then left his smart phone at the bar downstairs, amongst other things.

I thought if his evening continued in the same vain, then it wouldn’t be long before he would be using the healthcare system he was confused about…

M45BC

“Most & Least Expensive States for Health Insurance.

Health insurance is a hotly debated political issue in the United States. It’s something we all need, but it is often expensive and out of reach for some people. While the health insurance debate takes place at the national level, health insurance rates actually vary between states. The two maps below show health insurance rates by state and average annual deductibles with a silver plan. Find your state and see how it compares to others.”

The Five States with the Highest Annual Deductibles

Florida: $6,913

Indiana: $6,763

Ohio: $6,625

Georgia: $6,188

New Hampshire: $6,163

The Five States with the Lowest Annual Deductibles

Pennsylvania: $1,733

Oklahoma: $1,863

New Jersey: $2,075

Massachusetts: $2,125

New York: $2,175

https://howmuch.net/articles/health-insurance-rates-by-state

#11 Bezengy on 12.07.19 at 3:12 pm

I can’t remember when I started investing, but I think I was nineteen. I can’t remember the day I hit my first $10k, or $100k total either. It just seems to all happen with time, like magic. To those kids who think they don’t have the cash to invest, you better start looking for that extra couple of hundred per month. For me it was reffing hockey, sometimes in -40 % arenas, that I do remember, frozen in my memory.

#12 Dave on 12.07.19 at 3:16 pm

Money Mart and other small loan business make a killing with compound interest….bankrupting their uninformed clients in the process

#13 WUL on 12.07.19 at 3:24 pm

My financial issues and struggles are compounding.

I’m confounded.

#14 Stoph on 12.07.19 at 3:27 pm

FYI: Albert Einstein received the Nobel prize in physics for his work relating to the Photoelectric Effect. I don’t know why, but he never received a Nobel prize for his work related to the Theory of Relativity.

#15 espressobob on 12.07.19 at 3:37 pm

Compounding is probably the best kept secret to successful investing.

Oops, shouldn’t have let the cat outa the bag.

#16 Shawn Allen on 12.07.19 at 3:37 pm

Choose Your Path, Victim or Victor

#13 Dave on 12.07.19 at 3:16 pm

Money Mart and other small loan business make a killing with compound interest….bankrupting their uninformed clients in the process

*****************************
Yeah, from above, like Einstein said:

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

You can complain about Money Mart or you can invest in a lender and earn compound interest. Or invest in a balanced way and earn compound returns. Either way some will pay interest and some will earn interest. It has ever been so.

#17 T on 12.07.19 at 3:59 pm

#10 Figure it Out on 12.07.19 at 1:54 pm
“You’ve completely lost any credibility in this debate when you fail to acknowledge…”

Yadda yadda yadda. Next time I’ll bring fewer facts and more feels, and we can debate it in your style. K?

—-

It’s amusing how you recognize only the ‘facts’ you post and none else.

A suggestion for next time is to recognize when someone provides more relevant and substantiated data, and debate the points without attacking the person.

I take your ‘yada yada’ and nonsense rebuttal as admission of your failure in all regards as it pertains to this debate.

#18 JSS on 12.07.19 at 4:04 pm

With some stocks you can see the compounding effect quite easily. Two that come to mind personally are: RBC and CN Rail. Holding these two stocks for at least a decade, while reinvesting the dividend, you will see the results of compounding. If you hold for two decades or more, you’ll be laughing.

First comes compounding. Then comes laughing.

#19 DON on 12.07.19 at 4:09 pm

#108 crazyfox on 12.07.19 at 2:28 am

SHAZZAM! Decent Foxy Decent!

‘In a related story: In the wee hours of the morning, Kenney’s Oil War Room went to DEFCON 1. There are reports that Andrew Scheer is on route to assess damages incurred by a little truth being spoken.’

At least you will have head start – it will take them a couple of weeks to read what you wrote.

#20 Kurt on 12.07.19 at 4:36 pm

#15 Stoph on 12.07.19 at 3:27 pm
Einstein received the Nobel for his work on the photoelectric effect because it paved the way for quantum theory, which has had a much more immediate and wide-ranging effect on physics than either general or special relativity. Special relativity was an adjustment to the existing theory and general relativity, while surprising and beautiful, has not had anywhere near the practical impact of quantum (as I write on hardware designed almost exclusively on the hardware consequences of quantum.) Cheers! -K

#21 SoggyShorts on 12.07.19 at 4:36 pm

Hi Ryan, a quick jump back to your US withholding taxes post:

I have a VGG investment now worth ~$250K that has gone up 22% (split between a corp margin account and a joint non-registered account)

Is it worth it to sell it off, use NG, and buy VIG directly realizing all of those capital gains now to avoid some of the future US withholding taxes?

Here’s what I’ve figured:
Our marginal tax rate is 30% so if we each realized 10K in capital gains it would cost us about $3,000 total.
With a yield of 1.13% on 125K we are getting burned for almost $250 a year in extra US withholding taxes so
it would take 12 years to make it back in savings by selling now.
Then if we add-in today’s blog post about compounding it’s much much longer than 12 years, isn’t it?

So perhaps the answer is to just leave it alone?

Thanks again!

#22 Ryan Lewenza on 12.07.19 at 5:04 pm

SoggyShorts “Hi Ryan, a quick jump back to your US withholding taxes post:

I have a VGG investment now worth ~$250K that has gone up 22% (split between a corp margin account and a joint non-registered account)

Is it worth it to sell it off, use NG, and buy VIG directly realizing all of those capital gains now to avoid some of the future US withholding taxes?

Here’s what I’ve figured:

Our marginal tax rate is 30% so if we each realized 10K in capital gains it would cost us about $3,000 total.
With a yield of 1.13% on 125K we are getting burned for almost $250 a year in extra US withholding taxes so
it would take 12 years to make it back in savings by selling now.

Then if we add-in today’s blog post about compounding it’s much much longer than 12 years, isn’t it?

So perhaps the answer is to just leave it alone?“

Yup. Try to minimize the US withholding tax when you can but it’s probably not wise to trigger a large capital gain just to avoid a smaller withholding tax hit. – Ryan L

#23 Don Guillermo on 12.07.19 at 5:09 pm

#134 joblo on 12.07.19 at 12:18 pm
Hello Calgary meet Detroit

******************************************

Typical ugly Canadian mentality. Like a pot full of boiling lobsters – the ones at the bottom always reaching up to pull the ones at the top down.

#24 Sam on 12.07.19 at 5:14 pm

The problem with this kind of math is it uses an average , in this case 6%. That is not the real world, unless u can get a 6% GIC and THAT ship has sailed

The greater the beta of a portfolio, the greater the risk of underporming -thats math

Surprised u used this overly simplistic analysis Ryan

#25 Re., JSS on 12.07.19 at 5:19 pm

Laughing?

You’re making an assumption , don’t you see it ? That those two stocks will repeat it’s past performance. :)

#26 BC_Doc on 12.07.19 at 5:40 pm

As Jack Bogle points out in Common Sense On Mutual Funds, costs are compounded to over time, whether mutual fund costs or advisor fees. This needs to be reinforced too.

#27 SoggyShorts on 12.07.19 at 6:02 pm

#23 Ryan Lewenza on 12.07.19 at 5:04 pm
SoggyShorts “Hi Ryan, a quick jump back to your US withholding taxes post:

I have a VGG investment now worth ~$250K that has gone up 22% (split between a corp margin account and a joint non-registered account)

Is it worth it to sell it off, use NG, and buy VIG directly realizing all of those capital gains now to avoid some of the future US withholding taxes?

Here’s what I’ve figured:

Our marginal tax rate is 30% so if we each realized 10K in capital gains it would cost us about $3,000 total.
With a yield of 1.13% on 125K we are getting burned for almost $250 a year in extra US withholding taxes so
it would take 12 years to make it back in savings by selling now.

Then if we add-in today’s blog post about compounding it’s much much longer than 12 years, isn’t it?

So perhaps the answer is to just leave it alone?“
——–

Yup. Try to minimize the US withholding tax when you can but it’s probably not wise to trigger a large capital gain just to avoid a smaller withholding tax hit. – Ryan L

****************************
Well the min/maxer in me is annoyed by the inefficiency, but the lazy part of me(often dominant) is happy about not having to do that work(esp NG), so I’m overall happy with the answer :)

BTW when you want to make investments for your clients in USD ( I think Garth recommends some 20%+?) do you do Norbert’s Gambit for them?

#28 Don Guillermo on 12.07.19 at 6:04 pm

Substitute Russian for Canadian JoeBlow.

There is an old Russian fable about two poor peasants, Ivan and Boris. The only difference between them was that Boris had a goat and Ivan didn’t. One day, Ivan came upon a strange-looking lamp and, when he rubbed it, a genie appeared. She told him that she could grant him just one wish, but it could be anything in the world.
Ivan said, “I want Boris’ goat to die.”

#29 IHCTD9 on 12.07.19 at 6:28 pm

They should teach this stuff in school. At least the youth have the net these days to help (or hinder) them along.

We started socking away cash monthly in our mid 20’s, but we should have pumped more in there, and we could have done it too. That would have allowed for an earlier retirement. As it is; we’re likely going to pack it in at 65 – although probably working part time starting at 60.

#30 IHCTD9 on 12.07.19 at 6:55 pm

This is another example of how folks – especially today’s youth – get financially wrecked by living in high RE/Rent areas. X years getting a degree or two, X years paying off huge student loans, and then X years saving for a down payment or living in a box paying 2-3K/month for rent and still saving jack.

By the time things are looking stable on the financial front – they’re 40 years old, own zero big assets (or are still carrying a huge mortgage), and have zip saved. Looking at the chart posted, now they have to cough up 1500.00/mo. on top of everything else to get caught up. Very high wages are required under these circumstances to finish in good shape.

Contrast that to more affordable areas with lower incomes, but much lower costs. By 40, the mortgage could be near done, plus at least couple hundred grand saved on top.

All because the costs of living allow the savings to begin much younger, and this means much lower, (ie. doable) deposits to finish well.

#31 Long-Time Lurker on 12.07.19 at 7:02 pm

#124 crowdedelevatorfartz on 12.07.19 at 10:36 am
@#84 Sail Away
“Of course it was fake.
And.. with this front and centre, how do you feel about the climate emergency?
Oh- that’s real? Uh huh.
“””””””

Tell that to the 45 million people in Southern Africa living under a years long drought….

https://www.theguardian.com/world/2019/dec/07/victoria-falls-dries-to-a-trickle-after-worst-drought-in-a-century

Or the 3 million people of Sidney…..

https://www.reuters.com/article/us-australia-bushfires/giant-fire-near-sydney-may-burn-for-weeks-as-people-struggle-to-breathe-idUSKBN1YB01D

Nothing to see here….move along people…..nothing to see….

…Data from the Zambezi River Authority shows water flow at its lowest since 1995, and well under the long-term average. The Zambian president, Edgar Lungu, has called it “a stark reminder of what climate change is doing to our environment”.

Yet scientists are cautious about categorically blaming climate change. There is always seasonal variation in levels.

Harald Kling, a hydrologist at engineering firm Poyry and a Zambezi river expert, said climate science dealt in decades, not particular years, “so it’s sometimes difficult to say this is because of climate change because droughts have always occurred”.

“If they become more frequent, then you can start saying: OK, this may be climate change.”….

https://www.theguardian.com/world/2019/dec/07/victoria-falls-dries-to-a-trickle-after-worst-drought-in-a-century

…Bushfires are common in Australia during the hot summer, which begins in December, but this year the fires started much earlier, blamed on soaring temperatures, dry winds and arson….

https://www.reuters.com/article/us-australia-bushfires/giant-fire-near-sydney-may-burn-for-weeks-as-people-struggle-to-breathe-idUSKBN1YB01D

#32 Long-Time Lurker on 12.07.19 at 7:09 pm

>Three months and hundreds of billions of dollars later…

Here, crowdedelevatorfartz. You can get hysterical over this, instead.

Nothing to see here.

Fed Adds $95.56 Billion in Short-Term Liquidity to Markets

Provided by Dow Jones
Dec 3, 2019 7:58 AM PST

By Michael S. Derby
The Federal Reserve Bank of New York added $95.557 billion in temporary liquidity to financial markets Tuesday.

The intervention came in two parts. One was via overnight repurchase agreements, or repos, that totaled $77.8 billion, and the other was via 14-day repos totalling $17.757 billion. The Fed provided all the liquidity that eligible banks sought.

Fed repo interventions take in Treasury and mortgage securities from eligible banks in what is effectively a short-term loan of central-bank cash, collateralized by the securities.

The Fed’s interventions are aimed at ensuring that the financial system has enough liquidity and that short-term borrowing rates are stable and consistent with Fed goals, with the central bank’s federal-funds rate staying within the 1.5%-to-1.75% target range. The effective fed-funds rate stood at 1.56% on Monday. The broad general collateral rate for repo trading stood at 1.60%, also for Monday.

The Fed has been intervening in markets in the current fashion since mid-September, when short-term rates unexpectedly shot up on a confluence of factors. That said, the Fed has used similar operations for decades to manage short-term rates.

Since the large interventions started, money-market rates haven’t been volatile. The Fed is using temporary operations to tamp down any possible wild moves, while purchasing Treasury bills to build up reserves in the banking system. It hopes that by buying Treasury bills it will be able to cut back on repo interventions at the start of next year.

The Fed currently expects to buy Treasury bills through the middle of next year.

Write to Michael S. Derby at [email protected]

https://www.morningstar.com/news/dow-jones/201912036218/fed-adds-99557-billion-in-short-term-liquidity-to-markets

#33 Ryan Lewenza on 12.07.19 at 7:11 pm

Sam “The problem with this kind of math is it uses an average , in this case 6%. That is not the real world, unless u can get a 6% GIC and THAT ship has sailed

The greater the beta of a portfolio, the greater the risk of underporming -thats math

Surprised u used this overly simplistic analysis Ryan”

How is a long-term average rate of return not accurate or appropriate? Of course annual returns will be different from year to year but they still amount to an average return over time. What would you propose me use instead? Finally, you’re missing the point of the post if your going to critique me using an average return versus some random return numbers like -5%, +12%, +4% etc. – Ryan L

#34 Ryan Lewenza on 12.07.19 at 7:13 pm

SoggyShorts “Well the min/maxer in me is annoyed by the inefficiency, but the lazy part of me(often dominant) is happy about not having to do that work(esp NG), so I’m overall happy with the answer :)

BTW when you want to make investments for your clients in USD ( I think Garth recommends some 20%+?) do you do Norbert’s Gambit for them?”

Yes we utilize this FX trading strategy for clients. – Ryan L

#35 Nonplused on 12.07.19 at 7:28 pm

When Einstein said that compound interest was the “eight wonder of the world”, what he meant was that it was mathematically impossible. The explanation that follows “He who understands it, earns it … he who doesn’t … pays it.” explains that it is impossible for everyone to be earning compound interest, it simply moves money from one person or entity to another.

Interest should be differentiated from organic economic growth for this discussion. The economy does expand and that expansion has been exponential.

So saving is great and if you can be one of the people that earns interest, especially compound interest, the more the merrier. But for most people the problem is they don’t have $499 a month to save. I certainly didn’t when I was 25, and I was working as an engineer! Not a poorly paid profession. But I was married, putting my wife through school, and wrestling with student loans (which were at 11% back then).

And with Trudeau’s new carbon tax set to take another $2000 to $4000 per year in taxes out of the average family’s budget through direct and embedded taxes, this problem is only going to get worse. The average family has limited options for either increasing income or reducing energy consumption. It’s not like energy isn’t expensive enough already and people are just blindly throwing money at it wastefully (monster truck drivers excepted, but I don’t think they are the types that would save any money anyway).

Our stupid crop of politicians think that if you tax something, the money will just magically appear. That’s not the way the real world works. In order to pay the tax, people have to not spend the money on something else, including savings. Any new tax of any form just diverts more of the GDP to the government. That would be fine if the government was the most efficient place for the money to go but I think we all know that that just isn’t so.

In today’s world very few 25 year old people are going to be able to set aside $499 a month (after tax!). That person who can do it is going to be single, rent a modest apartment, drive a used car, have no student loans, doesn’t fly-away vacation, and has a pretty good job. Most everyone else is screwed and won’t be able to start saving until they have established themselves in a pretty good career.

This is why most Canadians are not on their way to a million dollar nest egg. And Trudeau is here to make it all worse. Much worse.

Most fortunes come from some sort of capital gains, not savings, unless you are a high income earner. Most people just don’t have any money left to save. Sure, if they have a boat it’s their own damn fault but I suspect most people don’t. And the problem with things like boats, if you are going to have one, is that they are more useful when you and your family are young enough to enjoy it, not after you have saved a million dollars, so the time value of life affects many of these decisions. Better to have a boat today, for tomorrow you may die.

#36 Sam on 12.07.19 at 8:14 pm

Ryan , two portfolios avarage 6% for 15 years both start with the same amount , $500,000 . Portfolio A has a beta that is 1/3 rd smaller than portfolio B.Which portfolio will have the higher balance 15 yes later ? Hint – it’s math

Again ,using an average can be misleading

#37 SoggyShorts on 12.07.19 at 8:17 pm

#36 Nonplused on 12.07.19 at 7:28 pm
In today’s world very few 25 year old people are going to be able to set aside $499 a month (after tax!).

*****************************
I dunno.. it might be hard for some, but for others, it’s close to just 1 shift at minimum wage per week.
Hopefully, at some point, they’re making more than minimum wage though reducing it to only a few extra hours per week.

Perhaps the opportunities aren’t out there in every city, but what I never seem to hear about anymore is young people working overtime. I used to LOVE overtime: 50% more pay for the same job?!!? Sign me up!

I know of the last 6 employees I had only 1 was willing to work overtime and he was my age(late 30s) the younger ones wouldn’t even consider putting in a weekend or 10 hour days once in a while.

Disclaimer: exactly zero of the overtime dollars earned in my 20s went to anything as responsible as investing.

#38 Stan Brooks on 12.07.19 at 8:37 pm

That sounds wonderful on paper, thanks Ryan.

Of course we have the government to tax the capital ‘gains’ (soon to be increased, as it seems) on non-registered accounts, to tax the withdrawals on RRSPs and to limit pretty much to local companies investment the TFSAs (not included in preferred dividend tax treatment exclusions in US)

+ the Inflation which as it seems is comparable with and sometimes surpasses the net compound gains/specially as of lately.

+ we have all the clawbacks from the governments in terms of reduced benefit payments as now you are ‘rich’.

+ we have the risk of some sort of expropriation on registered funds ‘in the name of fairness and for the benefits of all Canadians’.

Not that there are many other comparable investment options at the moment but I highly doubt the guaranteed outcome from investments because of current government policies and the bleak perspective for the economy.

+ we are facing as it seems some immediate severe resource constraints that justify the climate change noise, so looking for preservation of capital (not that staying in fast declining in terms of purchasing power currencies or negative yielding trash/considering the inflation called bonds are viable options) vs. return on capital might be a wise strategy.

———————————–

#36 Nonplused on 12.07.19 at 7:28 pm

Great post. Absolutely agree.

————————————-

Cheers,

#39 crowdedelevatorfartz on 12.07.19 at 9:36 pm

@#29 Don Guilliermo
“Ivan said, “I want Boris’ goat to die.”
+++++

Good one.
Reminds me of a conversation I had with a Russian co worker one time. I commented that Russians always looked so serious, never smiling or laughing.
He explained that Russian men consider other men who smile or laugh in public as imbeciles or idiots.
He said there was an old Russian joke about a man named Ivan who was at a party where many jokes were told and he never laughed or smiled.
Later that night when the state police kicked down the door of his next door neighbour Boris and mistakenly arrested him thinking he was Ivan.
Ivan smiled and fell back to sleep.

#40 crowdedelevatorfartz on 12.07.19 at 9:50 pm

@#33 Love me Long Time

https://www.morningstar.com/news/dow-jones/201912036218/fed-adds-99557-billion-in-short-term-liquidity-to-markets

Yeah I read about that in The Economist a few weeks ago.

Interesting.

#41 Smoking Man on 12.07.19 at 11:42 pm

The power aging… It sucks..

#42 Tccontrarian on 12.08.19 at 1:08 am

You shouldn’t be worrying about the next bear market – you should be worried about the current one (already 15 months in).
And if you claim next year that it was ‘unexpected’ and no one could’ve predicted it, now that would be compounded lie.
Tcc

#43 Don Guillermo on 12.08.19 at 2:01 am

Our stupid crop of politicians think that if you tax something, the money will just magically appear.

****************************************
Our politicians aren’t stupid. They’re immune to the economic fallout. The Canadian voters are stupid.

#44 Don Guillermo on 12.08.19 at 2:09 am

#40 crowdedelevatorfartz on 12.07.19 at 9:36 pm
@#29 Don Guilliermo
“Ivan said, “I want Boris’ goat to die.”
+++++
Good one.
Reminds me of a conversation I had with a Russian co worker one time. I commented that Russians always looked so serious, never smiling or laughing.
He explained that Russian men consider other men who smile or laugh in public as imbeciles or idiots.
He said there was an old Russian joke about a man named Ivan who was at a party where many jokes were told and he never laughed or smiled.
Later that night when the state police kicked down the door of his next door neighbour Boris and mistakenly arrested him thinking he was Ivan.
Ivan smiled and fell back to sleep.

***********************************

Another Boris classic is “they pretend to pay me, I pretend to work” …. think of a thick Russian accent kind of like the old Boris/Natasha cartoon (Rocky & Bullwinkle) “gyet moose and squirrel”.

#45 Ponzius Pilatus on 12.08.19 at 2:45 am

#30 IHCTD9 on 12.07.19 at 6:28 pm
They should teach this stuff in school. At least the youth have the net these days to help (or hinder) them along.

We started socking away cash monthly in our mid 20’s, but we should have pumped more in there, and we could have done it too. That would have allowed for an earlier retirement. As it is; we’re likely going to pack it in at 65 – although probably working part time starting at 60.
————
Or you could have travelled the world.
And realized there’s more than your hillbilly world.

#46 IHCTD9 on 12.08.19 at 8:27 am

#46 Ponzius Pilatus on 12.08.19 at 2:45 am

Or you could have travelled the world.
And realized there’s more than your hillbilly world.
——-

I had mouths to feed and bills to pay back then Ponzie. Still do. Priorities my man, I’ve never been rich enough to “do it all”, so some things have to wait.

Plus, the world has little to offer a guy like me over what my redneck paradise already offers. :)

#47 IHCTD9 on 12.08.19 at 8:39 am

#5 Ponzius Pilatus on 12.07.19 at 12:51 pm

There will be no Brinks truck behind my hearse, for sure.
No regrets.
——-

Ponzie! You should have made a list of priorities in your youth and saved 1 million during your working years.

Then right now, you’d be traveling! Plus you’d own a sweet F150 instead of a bus pass!

#48 say it aint so on 12.08.19 at 9:35 am

most world markets are below their 2007/8 peaks (mexico, australia, canada, hong kong) and many european markets are below their 1998/2000 peaks (german, UK, Sweden, Spain, Italy, etc). and Japan, well, that’s been a basket case since the late 80s.

the only markets worth investing in have been the SP and Switzerland. everything else has been garbage for 20+ years.

You ignore rebalancing and dividend distributions. Amateur mistakes. – Garth

#49 Space Cowboy on 12.08.19 at 10:26 am

Dig it, get it, but, what about buying a sweet stock like stodgy BCE that increases 500% in short order ? What if you stuff your quiver with beauties like this, like CGI that rocked up from $15 to $110 ? Now imagine owning a basket of 50 or so little rabbits that keep morphing into raging stud muffins? Now, you’ve got a problem
, you’ve made more money , what to do? Do you hire an advisor to slam on the brakes or quit your job and grab life by the balls and live it? TFSA season is coming in a few weeks, I’m going straight to the stock market instead of worrying. Is it tough sometimes to be wrong sometimes? I was wronged by the market last year a few times, ex: PGF, a great little company that Trudeau killed. Hey, me and Schulick got burned. At least I didn’t go all in like him , for $161 million. But it makes for a great little tax loss sale which I completed yesterday so that I will not pay any tax on the one other forced sale earlier in the year that was done a huge profit when it was bought out. Wahhhhh, I had to put a massive wallop of cash in my taxable account. Now it’s been neutralized. I’m staying in a five star hotel tonight on a stunning tropical beach . I appreciate the compounding story, but waiting to die rich isn’t an appealing thought. Living rich is better. Buy stocks, you’ll never regret it.

#50 Ryan Lewenza on 12.08.19 at 10:32 am

Sam “Ryan , two portfolios avarage 6% for 15 years both start with the same amount , $500,000 . Portfolio A has a beta that is 1/3 rd smaller than portfolio B.Which portfolio will have the higher balance 15 yes later ? Hint – it’s math. Again ,using an average can be misleading”

Sorry but I don’t understand what your point is. Beta is a measure of risk/volatility of a stock/portfolio relative to the overall market (eg S&P 500). A beta of 1.3 for example means the stock/portfolio is 30% more volatile than the market. Based on Markowitz’s Modern Portfolio Theory or the “efficient frontier”, the higher the beta the higher the expected rate of return. So of course in your example if two portfolios have a different beta they should have different rates of return and outcomes. However each of these different portfolios will still have a long-term average rate of return (ie one at 5% and one at 7%), which in my analysis I just assumed a 6% return. In my analysis I could have used 5% or 7%, or shown 3 different portfolios with 3 different average rates of return, but this would not have been germane to the main point I was making, which is the power of long-term compounding returns, whether it be 4%, 6% or 20%. – Ryan L

#51 oh bouy on 12.08.19 at 10:35 am

@#48 IHCTD9 on 12.08.19 at 8:39 am
#5 Ponzius Pilatus on 12.07.19 at 12:51 pm

There will be no Brinks truck behind my hearse, for sure.
No regrets.
——-

Ponzie! You should have made a list of priorities in your youth and saved 1 million during your working years.

Then right now, you’d be traveling! Plus you’d own a sweet F150 instead of a bus pass!
————————–

the sentiment is probably ‘you can’t take it with you’ so might as well spend it all before you go.

#52 Ryan Lewenza on 12.08.19 at 10:47 am

Tccontrarian “You shouldn’t be worrying about the next bear market – you should be worried about the current one (already 15 months in). And if you claim next year that it was ‘unexpected’ and no one could’ve predicted it, now that would be compounded lie. Tcc”

The S&P 500 and TSX are trading near their all-time highs as we speak. If this is a bear market I’ll it all day long. – Ryan L

#53 Elcheapo on 12.08.19 at 10:57 am

Great post as always Ryan. One point is like to make from personal experience, as the guy who must save 2k+ a month in order not to eat cat food at retirement, is that it’s a LOT easier for me to save 2000/month when I’m 50 making 220k a year than saving 500/month when I was making 25000/yr.

#54 crowdedelevatorfartz on 12.08.19 at 11:23 am

@#48 IHCTD9
“Plus you’d own a sweet F150 instead of a bus pass!”
++++

I think Ponzie would also need a library pass….since…. according to his retirement philosophy…. he squandered all his money travelling the world in his youth….
Austria, South America, eventually Canada.

#55 crowdedelevatorfartz on 12.08.19 at 11:36 am

Enough pandering to Ponzie’s ego.

Will the Socialist Hordes in Britain win a minority Govt?

Will avowed Communist Corbyn turn the clock back to the 1970’s and nationalise all the major industries in Britain?

Only bumbling Boris Brexit knows for sure…….

https://www.reuters.com/article/us-britain-election/johnson-pledges-transformative-brexit-as-nerves-are-rattled-by-uk-polls-idUSKBN1YC074

#56 Phylis on 12.08.19 at 11:58 am

The space cowboy is at a beautiful place yet hangin’ with the steerage. Is that a good example of a juxtaposition?

#57 Ponzius Pilatus on 12.08.19 at 12:14 pm

#47 IHCTD9 on 12.08.19 at 8:27 am
#46 Ponzius Pilatus on 12.08.19 at 2:45 am

Or you could have travelled the world.
And realized there’s more than your hillbilly world.
——-

I had mouths to feed and bills to pay back then Ponzie. Still do. Priorities my man, I’ve never been rich enough to “do it all”, so some things have to wait.
———–
So did I. 2 kids. Wife did not work untii they were nine.
Every two years. 1 month on Eurorail.
As you said, priorities.

#58 Sam on 12.08.19 at 12:17 pm

Ryan ,No . It’s portfolio A that will return more after 15 yrs.

Math , my friend . Remembee they BOTH average 6%, the only difference is the beta

#59 IHCTD9 on 12.08.19 at 12:35 pm

#52 oh bouy on 12.08.19 at 10:35 am
@#48 IHCTD9 on 12.08.19 at 8:39 am
#5 Ponzius Pilatus on 12.07.19 at 12:51 pm

There will be no Brinks truck behind my hearse, for sure.
No regrets.
——-

Ponzie! You should have made a list of priorities in your youth and saved 1 million during your working years.

Then right now, you’d be traveling! Plus you’d own a sweet F150 instead of a bus pass!
————————–

the sentiment is probably ‘you can’t take it with you’ so might as well spend it all before you go.
— –

I’m just getting on Ponzie’s case (per usual :) ). It’s his life and his money, he can do as he pleases.

If we manage to squeak into the 7 figure zone at 65, I actually won’t be liquidating it on hookers and blow as is oft suggested. I’ve never been a big spender, and don’t see that changing. I’ll likely not be spending any more than Ponzie does during retirement.

If I had no wife or kids, I’d definitely be planning to die broke!

#60 Shawn Allen on 12.08.19 at 12:46 pm

You Can Lead a Horse to Water…

The old saying is well illustrated by some of the negative comments above.

#61 Kozman on 12.08.19 at 1:01 pm

Hi Ryan,

Great post!
I have been a fan of the compound interest being the 8th wonder of the world for years now.
We starting saving like misers in our late 20’s, to develop a nest egg before having any kids. (we both worked in the volatile oil patch, with questionable job security).
We Spent her income (lower) and saved my own (Higher).
No matching BMW’s in our driveway.

Fast forward 12 years.
2 lovely kids and a stay at home mom to raise them.

The push to build the nest egg was the typical irrational fear of being new parent.
However, the end result is that the beauty of Compound interest has grown the nest egg so that the passive Income replaces my wife’s income, so there is no panic for her to go back to work. That passive income is further saved and compounded even further. Love it.

Race to Save everyone.
Life is so much more comfortable as a result.

#62 say it aint so on 12.08.19 at 1:03 pm

The S&P 500 and TSX are trading near their all-time highs as we speak. If this is a bear market I’ll it all day long. – Ryan L
__________________________________________

the brazilian and argentine markets are at all time highs too. does that make them bull markets?

the TSX is still 20% below it’s 2008 highs when measured in USD. measure everything in the same currency, then start talking about all time highs

#63 Shawn Allen on 12.08.19 at 1:32 pm

The Numbers Shall Confess! Or be Tortured Until they Do!

#64 say it aint so on 12.08.19 at 1:03 pm retorted:

the TSX is still 20% below it’s 2008 highs when measured in USD.

********************************
Where there you go then. And if that is not sufficiently negative then it’s down even more after inflation. Right?

If you wish to deny reality, you can always find a way to do so. In reality, the TSX is up in the coin of this particular realm especially with dividends added in and even after deducting inflation.

Most Canadians have the great majority of their current and future expenses in Canadian dollars, not U.S.

If you want to measure in U.S. dollars then I guess most Canadians have taken a huge pay cut from the days the Canadian dollar was at par. But inflation has been probably below zero when measured in U.S. dollars. Depends on the time period chosen of course. Be sure to choose whatever time period suits the answer you want.

#64 dumpster fire on 12.08.19 at 2:25 pm

#60 Sam on 12.08.19 at 12:17 pm
Ryan ,No . It’s portfolio A that will return more after 15 yrs.

Math , my friend . Remembee they BOTH average 6%, the only difference is the beta

***

Math is hard. You should be using geometric mean for asset returns, not arithmetic mean. Both portfolios would return the same over that period, but portfolio B would be more volatile.

#65 Re , dumpster fire on 12.08.19 at 4:13 pm

Wrong .Sam is right a it’s been proven

We need better Schooling in Canada

#66 Tccontrarian on 12.08.19 at 6:19 pm

Ryan, referencing sp500 record highs while ignoring Russell2000 is either disingenuous or just plain naive.
I don’t care about having a debate with you, it’s not personal. The Market cares not of egos. Besides, how well did you negotiate 2008-9? (My source made a killing BTW)
TCC

#67 HH on 12.08.19 at 7:57 pm

@#29 Don Guilliermo, #40 crowded
“Ivan said, “I want Boris’ goat to die.”

Actually the original of that Russian joke, as I recall it, went like this:

Genie tells the peasant: “I’ll grant you any wish, but with one condition. Your neighbour will get TWICE whatever you are getting”. To which the peasant replies: “Okay, I wish for one of my cows to die”.

Or in a darker version: “Okay, poke out my left eye”.

And nah, I wouldn’t quite go so far as to say “Russian men consider other men who smile or laugh in public as imbeciles or idiots.” That says more about the personality of that one Russian dude you talked to than the culture in general.

It’s probably more accurate to say all North Europeans (Russians, Scandinavians, Brits, etc.) are culturally less loud and outgoing than North Americans, whom they find extremely bubbly, chatty and hyper.

We don’t think you stupid for that. But there are moments when we gaze at a Canadian or an American wistfully and think: “What’s this guy on? I want to have whatever he’s having…”

#68 Frank Santos on 12.08.19 at 11:47 pm

I remember sitting in a Royal Bank branch 30 years ago with my parents RRSP contribution time and the illustration of 12% annual rates for 40 years got them $1 million or so.

Now, at 6% it is more like $350 a month instead of $100 a month. I would say that using a TFSA may not even out this big gap but help it to a certain point.

#69 ajeet yadav on 12.11.19 at 12:56 am

Yo said right if any one start investing from his early age like 25 he would able to save very big amount at the age of retirement.