The Most Important Investment Milestone For Young Investors

Markets have been doing well this year and many investors have been rewarded with strong returns for their patience, sticking to their long-term investment plans coming out of 2022 & 2023.  Despite this, some young investors may have only seen the value of their investment accounts increase by a few thousand dollars. If they’ve also been adding money regularly to their portfolio for a few years, the strong return (measured and expressed as a %) doesn’t FEEL as good as it should when they look at the $ value on their statements. Why is this? Is it because of hidden fees? Is someone lying to them? If they’re working with a reputable, accredited financial planner or advisor, hopefully neither of these reasons are the case. For many, the truth is that growing your investments to $100,000 takes significantly more time than reaching the next $100,000 or even $200,000.

I found a great article that runs through the detailed math and which I’ve borrowed from here: https://fourpillarfreedom.com/the-math-behind-why-net-worth-goes-crazy-after-the-first-100k/

Using the example of someone who invests $10,000 annually, growing at a 7% interest rate takes them 7.84 years to reach $100,000.

It then only takes 5.1 years to reach $200,000, 3.78 years to reach $300,000, 3 years to reach $400,000 and 2.5 years to reach $500,000. This is the power and ‘magic’ of compounding often taught in financial literature – using the growth of your investments to grow on itself.

Another key point is that it takes almost the same amount of time to earn your first $100,000 as it does to earn your next $200,000.

Here’s what’s more interesting – the rate of return you earn makes little to no difference towards reaching your first $100,000, it still takes roughly 8 years.

The key take-aways for any young investor are two-fold: Firstly, your discipline towards saving is the most important factor towards your investing success in your early years. Secondly, the first number of years until your portfolio surpasses $100,000 will feel like your portfolio is ‘standing-still’. Don’t be discouraged and fall victim to the mistake of impatience, abandoning your long-term investment plans to chase the next hot investment that someone promises will grow your money in a much shorter time period.

The late Charlie Munger, who ran Berkshire Hathaway alongside Warren Buffett, when asked about reaching the first $100,000 provided this scholarly perhaps even more sage advice: ‘It’s a b----, but you gotta do it’.

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