I first read about this chart from Investment Moats. Still, it took me a good couple of months before I realised its implications. In essence, the chart means that you do not need to be good in investing in order to be rich! Pushing the envelop further, it can also mean that everyone could be rich, provided you follow the advice in the chart. The chart is extracted from Vanguard's Principles for Investing Success.
|Effects of Savings Growth & Returns|
Take a look at the chart above. It plots the value of several portfolios with different savings growth and annual returns. The interesting part of the chart shows that a portfolio with 10% savings growth and 4% returns (dotted red line) could actually outperform a portfolio with 5% savings growth and 8% returns (brown full line)! Before coming into contact with the chart, I thought that the returns rate was the most important factor in growing your wealth. This chart proved me wrong. It also proves that you do not need to be good in investing and achieve double-digit returns in order to be rich. In fact, you do not even need to take on much risk to achieve a 4% return. Several preference shares and bonds could give returns of 4% or more. A list of such preference shares and bonds can be found here. Although Singapore Government Securities (SGS) bonds are currently yielding slightly less than 3%, with interest rates returning to normal in the next couple of years, the yields on these government bonds would also trend higher. The current yields of SGS bonds can be found here.
Are there any catch in this? There is a small one. Assuming a person starts off saving 10% of his monthly starting salary of $3,000, the initial monthly savings is only $300. But at 10% growth rate, the monthly savings would quickly grow to $4,750 by Year 30. It is probably very difficult for anyone to save such a huge amount monthly. However, even if you are unable to follow the 10% savings growth for the entire 30 years, a large amount of savings would have already been accumulated and invested by that time. Assuming the maximum amount that could be set aside every month is $2,500, this ceiling would be reached by Year 24. The value of the portfolio would be $779K at the end of 30 years, compared to $886K if you had followed the 10% savings growth throughout. This value is still higher than the portfolio with 5% savings growth and 8% returns ($744K). The chart below plots the value of the 3 portfolios.
|Portfolio Value with Different Savings Growth & Returns|
In conclusion, you do not need to be good in investing to be rich! Just like AirAsia's slogon, Everyone Can Be Rich!