What One and Three Percent a Month Look Like After Ten Years

[Fairman]

What One and Three Percent a Month Look Like After Ten Years

Scenario: compare two paths over ten years, 120 months, with no withdrawals. One earns 1 percent a month. The other earns 3 percent.

Compute the growth. At 1 percent: 1.01 to the 120th power is about 3.30, so 10,000 becomes about 33,000. At 3 percent: 1.03 to the 120th is about 34.7, so 10,000 becomes about 347,000.

The second path looks 10 times better. But examine its plausibility. 3 percent a month is about 43 percent a year, sustained for a decade. Very few professional managers have done that, and those who did typically took large risks and ran capital of limited size.

Now add monthly deposits of 100 dollars with a 1 percent monthly return. The future value of the deposits: 100 times (1.01 to the 120th minus 1) divided by 0.01, which is 100 times 230, about 23,000 dollars, from total deposits of 12,000.

Contributions can matter more than returns for small accounts. A saver who adds 100 dollars a month and earns nothing has 12,000. At 1 percent a month, 23,000.

What to take from it? Do not plan on 3 percent a month. Plan on a modest return, a steady contribution, and survival. The math of compounding rewards time and consistency.

Also note drawdowns reduce results. A 30 percent loss in year three would shrink the path substantially.

Exercise: compute the ten-year result for your own assumed return and monthly contribution.