Growing your portfolio efficiently
A short post this week.
Here’s a chart I look at all the time.
It’s a very simple chart indicating the growth of a portfolio given a certain starting amount, a constant investment amount per month, and a consistent return split equally between dividends and capital growth over time. Nothing earth shattering here.
The reason why I think this chart is important is because it highlights two distinct phases.
Phase 1: Growing the portfolio
In phase 1, by far the biggest effect on your portfolio value is your monthly contribution.
Consequently, the largest effect you can have on your portfolio during this phase is by increasing the amount you invest per month.
Phase 2: Investing the portfolio
In phase 2, your investmen returns begin to dominate your contribution.
In this phase, your investment returns are increasingly important.
Also very simple.
Simple Stuff – why bother writing about it?
In my experience, new investors get this totally the wrong way around.
They will stress over minute portfolio changes at the beginning, arguing for this LIC or that ETF, when the reality is, the only important thing is that they are investing (and really – saving).
Of course its important to get comfortable with investing at this stage, and it sets the tone for competent investing down the track. But heres the facts – investing is the important thing in part one, not your portfolio composition (assuming of course your are investing sensibly).
Once you reach the stage where portfolio returns are dominating your contributions, it is time to start paying a close eye to your portfolio, not set and forget. Giving up percentages at this point in your life not only costs you large amounts (assuming your portfolio has grown over time), but also has large effects on future compounding.
Edit: The delineation between stage 1 and stage 2 is where the gradient changes from steep to shallow. Because this happens over a number of months, you will be able to use a combination of investment profits and contributions to set an appropriate strategy for phase 2.