When I wrote the KB a few years ago there were 27 years, from 1989 to 2015 inclusive, and that was a lot of time for compounding to accumulate. As of the end of 2015, I had a 286-bagger on my entire portfolio. As you might guess, now, after the last two years, that total has become more than a 1000-bagger on the entire portfolio (1002-bagger actually). It obviously started small).
For Full Disclosure I should make clear that I currently have nowhere near a thousand times what I started with.
Why not? Well I retired at the end of June 1996 and have been living off the money I make in the market for the last 22 years. I have no other source of income except Social Security, which is a drop in the bucket.
What does that mean? It means for 22 years all expenses: food, paper towels, clothes, computers, telephones, restaurants, automobiles, gasoline, health insurance, uncovered medical expenses, sending my daughter to college and graduate school, paying her living expenses while she was there, paying rent, buying houses, upkeep, repairs, replacing the roof after a number of years, buying furniture, plumbers, electricians, traveling… well you start to get the picture.
And the money that came out isn’t just dollar for dollar. For example, you remember that my portfolio investing has grown to 343% of where it was at the end of 2016, a year and eight months ago. That means that $10 I took out at the end of 2016 doesn’t mean $10 that I don’t have now. It means $34.30 that I don’t have now that I would have had if I had left it in so it could continue to grow. And $100 I spent then would mean $343 I don’t have now.
And going back ten years, $10 I took out at the end of 2008 doesn’t mean $10 that I don’t have now. It means $120 that I don’t have now that I would have had if I had left it in, because my portfolio investing percent has grown 12 times since then.
And going back to the end of 2000, $10 I took out then means $330 that I don’t have now, because my portfolio investing percent has grown 33 times since then.
And going back to the end of 1996, the year I retired, $10 that I spent at the end of that year means $1,040 (!!!) that I don’t have now, because my portfolio investing percent has grown 104 times since then. (And $1,000 I pulled out then, means $104,000 I don’t have now).
That gives you an idea why, although my portfolio size has grown substantially, its nothing like 1000 times of where I started.
How do I calculate my portfolio percentage when I’m regularly withdrawing from it? Here’s the answer, straight from the KnowledgeBase.
Here’s how to calculate your overall returns ignoring cash flow in or out. Say you start the year with $14,000. You want to equate that with 100% and calculate gains and losses from there. So you ask yourself “What number (factor) would I multiply $14,000 by to get 100?”
By simple arithmetic we have 14000 x F = 100
And thus F = 100/14000 = .0071428
Sure enough 14,000 x .0071428 = 100
Now say three weeks later you have $14,740 and you want to see how you are doing, you multiply that number by .0071428 and you get 105.3 (so you are up 5.3%). If you don’t add or subtract money, that factor will work for the whole year.
Now say you add $2300 of fresh money, but you don’t want that to screw up your estimate of how well you are doing.
You add the $2300 to the $14,740 and get $17,040 which is your new balance that you are investing with. That’s your new starting point. It doesn’t affect how you’ve done up to here. You haven’t suddenly done better because you added money. You can’t still multiply by .0071428 because you’d get 121.7 and it would look as if you were up 21.7%, when you are really only up 5.3%.
So you need to change your factor to make it smaller so it will still reflect just the 5.3% gain you’ve made so far. You figure: “What would I multiply my new balance ($17,040) by to get 105.3, to reflect my 5.3% gain so far this year?”
F x 17,040 = 105.3
F = 105.3/17,040 = .0061795
And that’s your new factor. If you multiply it by 17,040, sure enough you get 105.3. Now you continue to see how you will do for the rest of the year.
If a little later you are at $18,000, you multiply 18,000 by .0061795 and you get 111.2, so you know that your investing is now up 11.2% for the year.
Same, if you take money out. You don’t want it to look as if you lost money. You calculate a new factor so you start from the same percentage where you were. If you were at $18,000 and your investing is up 111.2%, and you pull out $1000, you now have $17,000, so you figure what factor times 17,000 will give you 111.2% and you get 0.0065412. Sure enough $17,000 x 0.0065412 still gives you 111.2% and you haven’t messed up your investment growth percentages.
On January 1st of the next year, you write down how you did for the year to keep a record, and start over at 100 for the next year. Simple as that!
And a clue to those of you who plan to live off your retirement. The key is to think of what percent you can reasonably count on making as profit each year, and then make sure you spend less than that, so that your overall portfolio keeps growing. If you spend more than what you make and and start eating away your balance, it will be accelerating disaster.
Best to you all
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