The Third Pig

Fun with percentages: A fun, if only slightly useful, exercise is to calculate how a particular percentage return will grow money. The effects of compounding are magical over long periods of time. One way of completing this exercise is to measure how long it would take to turn a one-time $10,000 investment into a $1,000,000 nestegg. For instance, if we were able to invest our money in the Relative Value portfolio, and continue to receive a 35.8% annualized return indefinitely (highly unlikely mind you), a one-time $10,000 investment would become a million dollars in about 15 years.

Anyone over the age of 30 knows that 15 years goes by impressively fast. Comparatively, an investment in the S&P 500 at the annualized rate of return the index has provided the last two years, 19.45%, would turn that $10,000 into one million in 26 years. An investment in real estate (NCREIF Apartment Index), which had a two year annualized return of 11.04%, would accomplish that money increasing feat in a measly 44 years. And an investment in bonds (4.22% annualized over the last two years), as measured by the Lehman Brothers Aggregate Bond index, would do it in short 111 years.

Looked at another way, we can see how slight differences in return will result in extreme differences in the amount of money that is accumulated at the end of an investment period. For example, that 35.8% annualized return we received by investing in the Relative Value portfolio, would turn our $10,000 investment into $213,000 in 10 years, $4.5 million in 20 years and $44 billion in 50 years. An 11% annualized return, like the one you’d have gotten in real estate investing over the last two years, would turn $10,000 into $28,000 in 10 years, $81,000 in 20 years and $1.8 million in 50 years. Now, $1.8 million is a lot of dough, but I’ll take the $44 billion please…to go.

Click here for more of this client letter.