Sustainable Net Worth Percentage Gains

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There is a thread on BP about getting to $100M with some interesting commentary.  A lot of the comments revolve around compounding rate and what is sustainable.  It seems that growing your net worth should have some sort of logical saturation point as your base of wealth grows.  For instance, it seems logical that making 20% is much easier when you only need to increase from $100k to $120k, but that should be harder to do from $1M to $1.2M and even harder still from $10M to $12M.  The reasoning would be that as your wealth grows:

1.  The places to park money diminish because there are fewer projects that demand that much capital and are willing to pay high rates for capital

2.  People are likely to have marginal propensity to want to grow their wealth past a certain point.  At some point they're content and slaving away for incremental dollars has little utility past some point

This board has some fantastic investors and is probably one of the biggest collections of active real estate investors in the world.  I was wondering what people's thoughts are on what a sustainable growth rate in net worth is.  Is 20% up to some number impressive and then it drops to some other number afterwards?  Is 20% too low for initial growth rates?  Where do you figure it stabilizes and what is the general net worth that this occurs?  Are there other barriers here?  Any thoughts?

We were at 35%+ for the first few years when the amount of capital we were deploying was in the low 6-figures range.  As we've scaled (and as deals have been harder to find), we're finding 15-20% is about right.  That said, we're still in the 6-figures, and I'm quite certain that if we tried scaling to the 7-figures, we'd see a drop.

Personally, I think that a good active investing strategy should always yield at least 12-15%, but I could see anything above that getting difficult, at least with the strategies I'm most familiar with.  I'm sure there are some experienced investors who do things with their money that I've never even considered...

I think you're right, Bryan.  As net worth goes up, return is likely to go down to some degree. On one hand, the ultra-high net worth set is offered investment opportunities that others don't have access to...and those options may come with high returns. On the other hand, there are two factors that tend to limit overall portfolio returns (based on my conversations with those in this category):

1. Risk tolerance.  At a certain point, the desire to not lose what you have accumulated overpowers the desire to maximize portfolio growth.  Principal preservation strategies tend to be weighted toward lower-return alternatives. 

2. Dilution of returns.  While it might be easy to earn 20%+ returns on a small capital base, doing so on a large portfolio is difficult if not impossible. You are always likely to have some assets in cash and even a few losers, both of which steal yield from the better performing investments and water down the overall return.

So what is sustainable?  Great question, and there are probably as many different answers as there are people in this category.  If I had to venture a guess, I'd place it in the 15% range.

@Bryan Hancock

I think that the percentage should be much higher in the early stages of building wealth when you are in your five figures and low six figures. You take on bigger and bolder risks when you have nothing to lose. It is much better to lose $20,000 on a bad investment when you are single than to lose $700,000 on a bad investment and get wiped out when you have a family to feed. When your net worth figures start to reach $2M - $5M levels, there is no need to take on so much risk as your focus can now be about preserving and sustaining the growth of your wealth.

It takes 26% return to double your assets every three years. Looking at my overall portfolio and track record in the last 10 years, the one area of investing that has given me the greatest return well in excess of 26 percent has been my investments in small businesses. I would say that my overall ROI on small business investments has been more than 35%.I like to allocate 35% of my investments in this area.

I would say that my second highest ROI has been my SFR rental properties. Counting my newbie mistakes, I've averaged about 18%. I am very happy with my rental real estate investments, and I think with the experience and knowledge I have now, I can do better in the future, I wouldn't expect to earn 26% a year after year in real estate. I like to allocate around 35% of my investments in this area.

I would say if I look at my stock market portfolio since 1998, including my passive buy and hold, and trading commodities (gold/silver/oil/agriculture) and currencies. I probably averaged about 8% a year which is below the average return of S&P500 index since 1998 which why I am thinking indexing my portfolio is good way to go in the future. I like to allocate 20-25% investment in this area, but not to ever exceed 30%.

So in my humble opinion, I would say that the fastest and most feasible way to scale at 20% net worth at the 7 figure level is to concentrate your investments in your own business and innovative entrepreneurial ventures over investments in real estate and stocks.



 



Originally posted by @Bryan Hancock:

There is a thread on BP about getting to $100M with some interesting commentary.  A lot of the comments revolve around compounding rate and what is sustainable.  It seems that growing your net worth should have some sort of logical saturation point as your base of wealth grows.  For instance, it seems logical that making 20% is much easier when you only need to increase from $100k to $120k, but that should be harder to do from $1M to $1.2M and even harder still from $10M to $12M.  The reasoning would be that as your wealth grows:

1.  The places to park money diminish because there are fewer projects that demand that much capital and are willing to pay high rates for capital

2.  People are likely to have marginal propensity to want to grow their wealth past a certain point.  At some point they're content and slaving away for incremental dollars has little utility past some point

This board has some fantastic investors and is probably one of the biggest collections of active real estate investors in the world.  I was wondering what people's thoughts are on what a sustainable growth rate in net worth is.  Is 20% up to some number impressive and then it drops to some other number afterwards?  Is 20% too low for initial growth rates?  Where do you figure it stabilizes and what is the general net worth that this occurs?  Are there other barriers here?  Any thoughts?

James Park, Lender in GA (#NMLS 157229)
678-865-6250

Interesting comments everyone.  I agree that asset allocation is key here.  Many of my partners are pretty heavily weighted in one sector and lack diversification.  It is interesting how much your personal situation with family and risk tolerance influences your decision about what to invest in.  Continuing to grow in excess of 20% is very difficult past 7 figures and I agree that risk plays a big part in investment selection.  

In theory if one's risk was constant and they were simply seeking to grow at a sustainable rate in the absence of emotional reasoning do you feel like growth would still be stunted simply from a scale perspective trying to grow that much wealth as quickly?  

Another element to factor in is active income. This can create growth aside from invested assets.  Perhaps you can achieve 15% growth in net worth long term on your assets, but you juice it up by doubling your income a few times over your career. Possible if your income us derived from your own growing business(es).   Dumping an additional 6 figures into the balance sheet yearly from active income will substantially boost overall growth. 

"In theory if one's risk was constant and they were simply seeking to grow at a sustainable rate in the absence of emotional reasoning do you feel like growth would still be stunted simply from a scale perspective trying to grow that much wealth as quickly?"

I think growth would be stunted somewhat (maybe not much), simply because of fewer high return/low risk opportunities in the big dollar arena. The fewer opportunities draw more competition from institutional money chasing them.  So yes, scale alone is a limiting factor. 

It's funny I stumbled onto this thread. I have been keeping a net worth spreadsheet for almost two years now and decided to see what my YOY return was on net worth. Year 1 it was 6.5%, then last year it jumped to 68% (had a heck of a year). I started projecting what things could look like 10 years out if I jumped 50% each year and it looked pretty daunting. This thread demonstrates that it is higher to see a high return on your net worth as you grow it unless you continue to take bigger and bigger risks. All depends on what you want to do. 

I have been tracking my stuff for about 15 years now.  Here is my data starting with 7 data points:

7 - 25.4%

8 - 20.7%

9 - 20.1%

10 - 19.7%

11 - 19.4%

12 - 18.8%

13 - 18.6%

I lost 2 years of data from a home break-in in 2004, but the data above indicates my diminishing returns.  I have also found that I am less motivated now and expect for it to continue to decrease as time wears on and stabilize around 15 - 18% or so.  

@Bryan Hancock I think that the maximum any investor can expect over 25+ years is 20% or less. Granted this takes your question to the extreme of both capital and investment acumen and may not answer the mail when with regard to an individuals net worth, but looking at Berkshire Hathaway's returns since inception (1965) you'll see their compounded annual gain in Market Value is 20.8%.  Granted most everyone in the world does not have the opportunity, skill, personality, or access to funds as BH, however I think its a useful from the sense that:

1. We can track both their returns and growth of capital due to their availability in the public domain.

2.  BH's success stems from two partners growing a business over 50+ years.

3. While we on BP like to focus on RE, they got the start in investment and the insurance business and then expand from there. At some point net worth stops being about where you made your money in the beginning and more about how you allocated your capital once you have it.

From 1965-1990 they had wide swings in their returns (from -48% to +129% in the span of two years) in the past 20 years however their returns have reverted to the mean.

Check out their annual report for the chart (page 4) that has all of their returns.

http://www.berkshirehathaway.com/2016ar/2016ar.pdf

You also bring up another good point; do you track geometric return on Combined Annual Growth Rate.

I track both, but geometric averages are more accurate.  The numbers are very close for me year to year so it really isn't inaccurate to quote arithmetic means, but geometric means are more accurate.  

One of the primary risks in harvesting your portfolio is sequence of returns risk.   Some people learned the hard way that this matters when they tried to retire during the mortgage crisis.  

@Bryan Hancock I think you'll appreciate this article

http://www.cnbc.com/2017/06/14/millionaires-own-a-...

This is according to Boston Consulting Group (I would love to read their report): "Those worth $20 million to $100 million will see their wealth grow 8.4 percent a year through 2021, according to the report. Those worth more than $20 million will own more than a fifth of the world's wealth." Seems like your theory of getting 15% plus a year is much better than the projected average of 8.4%

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