Are market returns really the key to your portfolio value?

Short answer … No.

The key during the early years are your contributions. (See the Dark Blue line). You need to plant the seeds that can then grow later. I show below how it took 13 years for returns to overcome the power of contributions. And of course, you control contributions while your control over returns comes with risk.

This “returns are better than contributions” is an impression I commonly see expressed by my clients. A picture is better than words so I graphed a few examples using 4% and 8% returns*.


It is clear that saving $6000 a year is better than just saving $6000 once (bottom two lines).  It is also clear that continuing to save is better than stopping (red and purple lines divide at 10 years). It is also clear that starting early is better than later (the green line is starting late … and you can compare that to the purple line when contributions were stopped at that same point) It will take more of your money to catch the green line up with any of the other annual contribution lines. Also, higher returns are better. But that is with a caveat (see the two links below)! Finally, saving a bit more may be better than  reaching for greater returns (with greater volatility) … see the dark blue line which has the lower 4% return in this example (it took 13 years of returns to overcome the higher contribution rate … conclusion saving more in the short term is better than reaching for returns). 

Contributions now (those first 10 – 13 years) have the most impact on results versus market returns. Note that the lines are all close to each other early on. Market returns have an impact during later years. But, those later years don’t come unless you’re already making contributions now (the early years)!


Moral of the story: Contributions are important! If there are no contributions, there is nothing to grow. Start early rather than later. Save more rather than less. Reaching for returns comes hand in hand with volatility which serves as a drag on return (see links below for more on this point). Returns come from prudent portfolio allocations (see other commentary for this point).

Another perspective on Returns … It’s Not Just About Returns.


* Note these are NON-volatile returns so I include educational links as to the effect of volatility on returns (nut shell … you can’t get high returns without some volatility; the higher the return sought, in general the higher the volatility (they go hand in hand); and lastly volatility is a drag on returns).

For more on the volatility effect on returns please see these two links:

Volatility Drag

Compound Annual Growth Rate (Annualized Return)

The values depicted are of what the stated dollar value may have grown to over the time period indicated without volatility of returns and are for comparative purposes only. The hypothetical examples do not represent the returns of any particular investment.


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25 Responses to Are market returns really the key to your portfolio value?

  1. Larry Frank, Sr. March 17, 2012 at 11:01 pm #

    Hi. After posting this blog I came across this article in “The Economist” … Equity markets
    Shares and shibboleths How much should people get paid for investing in the stockmarket? Mar 17th 2012 | from the print edition (

    The bulk of the article goes into a discussion about real returns of equities (stocks). Of interest is the last paragraph, “Future Imperfect,” which pertains to this blog (extracting quotes):

    Begin quotes (with some text omitted … please see article):
    Nominal yields are close to historic lows. If the risk-free return is zero, then the entire return from equities will count as a risk premium. And a 4% premium would be only a little below the long-term average for America.

    That still would not be high enough for many pension funds. In America, local-government pension funds base their contributions on the assumption that they will earn 8% (in nominal terms) on their investment portfolios. Treasury bonds yield 2% at the moment, so a 4% risk premium suggests a nominal return of 6% on equities. That means pension funds will fall well short of their targeted return.

    Pension providers have two options: increase contributions or cut benefits. Cutting benefits will be difficult for many American states since pension rights are legally or constitutionally guaranteed. So taxes will have to go up or other services will have to be cut. Companies that have offered pensions linked to final salaries may have to divert money into their pension schemes, cash that could have been invested to boost the economy. Individuals who rely on private pensions (or on so-called defined-contribution benefits, where the company does not promise a payout) face the same problem.

    Equities are not a miracle asset that will turn measly contributions into a generous pension. Those who want to retire in comfort should save more.

    End quote.

    Across the board the conclusion? Pensions need more contributions or benefits cut. Individuals need to save more (or plan on reduced retirement income from their 401ks, IRAs, Roths, individual accounts, in other words from all their retirement oriented funds) because returns may not be as great as they were before.

    What can you control? Not market returns; but contributions.

  2. Larry Frank, Sr. May 18, 2012 at 3:03 pm #

    Reading the book “Paper Promises” by Philip Coggan (pp 151): Philip discusses how the savings rates across the globe stating “… this extra wealth seemed to relieve baby boomers of the need to save.” Savings rates fell globally as a result of asset prices going up … leading to a “wealth effect.”

    “In demographic terms, this did not make sense. The baby boomers were in their peak earning years and should have been saving for their retirement. But rising housing and equity markets appeared to be doing the work for them. They could have their cake and eat it; spend the bulk of their incomes and still see their wealth rise.”

    My thoughts exactly … and the moral of the story is: In hindsight, thinking that markets of any kind are going to do most of the heavy lifting towards reaching your goal is a mistake.

    Once again, yet another writer comes to the same conclusion I have … the secret to success and one you have control over … CONTRIBUTIONS, not returns.

  3. Larry Frank, Sr. July 25, 2013 at 1:34 pm #

    Here’s an article by Dr Craig Israelsen that comes to a similar conclusion using a different methodology

  4. Larry Frank, Sr. September 26, 2013 at 7:13 am #

    Morningstar has a pyramid that shows what factors are important and how important they are (free sign in needed)

    Of six bands on the pyramid, investors ignore the bottom 4 wider bands (wider the band, the more impact it has on investment success) while concentrating on the top two narrowest bands!

  5. Larry Frank, Sr. February 25, 2014 at 7:20 pm #

    Here’s an independent blog stating the same thing … secret to success? Start earlier than later:


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