The White Coat Investor Network[Editor's Note: There is a crossover point that most people do not reach until they quit their job (and their income drops): the point when their portfolio earns more than they get paid for their job. I still haven't reached that point and possibly never may. Today's WCI Network post from the Physician on FIRE discusses a slightly different but easier to reach crossover point—when your portfolio makes more in a year than you contribute to it. This is also pretty exciting to see and usually reached much earlier!]

I was twelve, maybe thirteen years old. Our elderly neighbors could no longer keep up with the flower gardens and shrubbery surrounding their country home, and I somehow found myself employed.

The job paid $2 an hour. I was small enough to easily squeeze in between and underneath the flora to pull weeds and I knew how to work a hose to keep everything green.

A few hours of work earned me enough to buy a stack of wax packs — that’s how football cards were packaged back in the day — a few weeks’ worth could get me a new LEGO set!

I had no portfolio to speak of. I did have a Joe Montana rookie card (I still have it, in fact) and a growing collection of Space LEGO. I was trading time for money for goods and I loved it.

Fast Forward Nearly Two Decades

At this point, I’m in my early thirties. I still have no portfolio to speak of. The Montana card and LEGO are in storage, but now I’m making more than $2 a minute. I’m trading time for money and loving it!

I’m finally an anesthesiologist, cheerfully getting up early, working late into the night, and doing the things I trained for so long to be able to do.

I start a few small investment accounts, but 99% of the progress in growing my net worth comes from my new job. In fact, in those early years of my career (think 2007 to 2009), those investments were only losing money while I more than made up for it by working my tail off.

It was disheartening to see those early mutual fund investments plummet, but I was familiar enough with the history of the stock market to know that in all likelihood, this too would pass.

Pass, it did.

Fast Forward Another Decade

I’ve heard that the first $1,000,000 is the hardest to acquire. Of course, it is. You have to work for it. I recall passing that milestone roughly seven years into my anesthesia career.

When you join the two-comma club, things happen more quickly. Your money is now working harder than ever, boosting your net worth more with each passing year while your input from the money you earn probably hasn’t changed all that much.

The second million came in less than half the time of that first million dollars. By the time I left my job and retired from medicine, that number had doubled again.

I wasn’t working any harder; in fact, I was working less as a part-timer the last couple of years. Luck certainly played a role; the market was on a historic bull run. The Rule of 72 playing out right before my eyes.

If I hadn’t been saving diligently all along, though, I wouldn’t have had the funds to benefit from the stellar returns that the stock market has given us.


Passive “Income”

Usually, when I talk about passive income, I put the word “passive” in quotes. The “passive” income that is bantered about online almost always has an active component, particularly early on, a fact that Passive Income MD readily admits.

In this case, the income I’m talking about is truly passive, but “income” isn’t the best term for the growth of an investment portfolio.

Essentially, I’m talking about the growth in your net worth that comes with each passing year that your portfolio gains value. Most of it won’t exactly be “income,” per se, as that term implies that the growth is realized as taxable proceeds that you’re free to spend or reinvest.

The “income” I’m referring to in this post is the total return that your portfolio gives you in a given year. It’s the amount that the value of your investment portfolio increases not from new contributions, but from the increase in net asset value and reinvestment of any dividends.

Regardless of the nomenclature, truly passive income is a beautiful thing, and that term rolls off the tongue much more smoothly than passive portfolio growth or passive net worth gains.

If you play your cards right, at a certain point in your career, you will find that in some or most years, your portfolio contributes more to your net worth growth than your job does. When that happens, you may start to question why you work as hard as you do.

I certainly did.


When Will You Reach the Tipping Point?

Since you’re still working in these years, I’ll assume that you’re invested in a reasonably aggressive fashion, i.e. mostly stocks. You may also be investing in real estate or alternatives and I’ll address that potential later on.

Given this assumption, one can expect plenty of volatility. Some years will be much better than others, and in some years, your portfolio will work against you. To me, it makes sense to break it down into years that are great, good, OK, and bad.


Great Years

2019, when this post was originally published, was a great year. The stock market returned around 30%. Any time you can get 25% or more from your portfolio, I’d call that a great year.

Historically, the U.S. stock market as measured by the Dow Jones Industrial Average (which actually has data going back more than a century) has generated great returns 20% of the time over the last 100 years.

If you are saving and investing $10K a year, you only need $40K in your portfolio to be out-earned by your investment accounts based on this data.

If you’re a high-income professional, living on half your take home pay in accordance with my live on half challenge, and investing $100K a year, a portfolio of $400K could add as much or more to your bottom line than your work does.

The formula is pretty simple. 100 divided by the percentage your portfolio gains equals the multiple of your annual savings that will equal your contribution to your net worth. That sounds like a mouthful, so let’s apply it to some other scenarios.


Good Years

The U.S. Stock market has returned, on average, roughly 10% per year over many decades. I’d call a good year anywhere from that average of about 10% up to 25%.

When your portfolio is 10x the size of your annual contribution (the amount you save and invest from your job), in a good year, your portfolio will contribute at least as much as you. 100/10 = 10.

In a very good year where your portfolio earns 20%, a portfolio of just 5x your annual savings will match your contribution. 100/20 = 5.

Looking at the last 100 years of US stock market returns, 30 of them have been good years.


OK Years

I’ll define an OK year as one in which you see a positive return in your portfolio, but less than 10%. By now, I suspect you can do the math yourself.

If your portfolio earns 4%, you’ll need a portfolio 25x the amount you’re saving and investing annually for the portfolio to work as hard as you at growing your net worth.

Those of you familiar with safe withdrawal rates should recognize these numbers. We’re not measuring the exact same thing, but the equation is the same. 100/4 = 25. When discussing withdrawal rates, we’re solving for how much you need to accumulate to meet your retirement spending needs rather than matching your annual savings, but the math is identical.

We’ve encountered OK years 18 times in the last century.


Bad Years

If you’re invested aggressively and the market is down, your portfolio is going to work against you in bad years. 32 of the last 100 years have been bad years. No matter how large the portfolio, it won’t do you any favors with a negative return.

Well, you could do some tax loss harvesting, but that’s a different article altogether.


The Role of Diversification

Few people have 100% of their nest egg in stocks, and no one I know is 100% invested in the 30 large cap stocks that make up the Dow Jones Index. I used it simply because it’s an index with more than a century of data.

If you had followed that strategy, one in every five years was a great year with gains of 25% or more. However, nearly a third of the time, your investments would have lost money.

Adding uncorrelated or inversely correlated asset classes has the effect of decreasing the frequency of both the great years and the bad years. That means more OK and good years, and most people would consider that a good thing.

Fixed income instruments such as bonds and annuities tend to give OK returns most of the time. In some cases, you’ll know exactly what you’re getting in advance.

Real estate runs the gamut, but in most cases, unleveraged real estate can be expected to give you high single-digit to low double-digit returns.

A diversified portfolio that includes multiple asset classes will increase the odds that your sizable portfolio out-earns you more often than not. Your floor (poorest portfolio performance) will be raised while your ceiling is lowered a bit, as well.


The Implications of a Hard-Working Portfolio

What does it mean when your investments make your net worth grow more than you can most years?

It’s both a wonderful and deflating feeling. On one hand, you realize that you could likely get by just fine without the job. On the other hand, it can make you feel like you’re spinning your wheels at work.

You put in all those hours and go the extra mile only to have the contributions you can make to your nest egg pale in comparison to the growth of the nest egg itself. It’s a first-world problem of the highest order, but it’s one that may have you questioning the role of paid work in your life going forward.

For example, let’s say you’re comfortably financially independent with 30x your anticipated annual retirement spending of $100,000 a year saved up and invested.

You accumulated this $3 million portfolio as a super-saver putting aside $100K a year, on average, which you’re still doing now.

In a pretty good year, the market gains 10% and your nest egg contributes $300K whereas your full-time job adds 1/3 of that amount.

In a very good year, the market gains 20%. Your portfolio is up $600K without you lifting a finger. In a great year… well, you get the idea.

You realize that your future net worth depends far more on market returns than whether or not you’re working. There are many reasons to work that have nothing to do with money, but at some point, you realize that the money you earn doesn’t impact your financial future much anymore.


Has Your Portfolio Made More Money Than You?

It’s remarkable when you first realize that your investment portfolio has out-earned you in a given year. How likely is that to happen? Let’s summarize what we’ve learned based on the historical performance of U.S. stocks.

  • If your portfolio is 4x the size of your annual contributions, it would have happened once every five years.
  • If your portfolio is 10x the size of your annual contributions, it would have happened half of the time (50 of the last 100 years).
  • No matter how big your portfolio is, a 100% stock allocation has lost money nearly one-third of the time.

Obviously, past performance is not predictive of future returns, and a diversified portfolio will alter the equation to some extent.

The take-home message is that at some point, you’ll have a hard time keeping up with the work ethic that your investment portfolio seems to have.

If you want your money to work for you, put in the work yourself, save a substantial chunk of what you earn, build a diversified portfolio, and reap the benefits.

Eventually, your hard work will pay off, and you won’t have to work so hard to grow your net worth. Your days of pulling weeds and filling the watering can are over. You can sit back and watch your garden grow.

Compound interest is a wonderful thing.

Has your investment portfolio out-earned you yet? Does it happen more often than not? Does recognition of that fact change how you feel about your career? Comment below!


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