Sometimes it's difficult to comprehend the enormous impact earning a few extra percentage points has on your portfolio each year. Paul Merriman in his article A Vanguard fund strategy to double your nest egg does a pretty good job putting it in perspective. Not only does he give you a great idea for a balanced, well-diversified (and cheap) portfolio, but he highlights how you can double your money once you retire.
Merriman explains how a simple portfolio made of Vanguard index funds has outpaced the S&P 500 by 2.2% over the past 10 years. Does that 2.2% difference make a big impact over the life of your portfolio? Merriman explains that "on a $100,000 portfolio over 10 years, that extra performance is worth $45,901 ($250,095 at 9.6% vs. $204,194 at 7.4%)....A typical investor will have money in the market for at least 40 years, including pre-retirement and postretirement periods. Over that long span, a $100,000 portfolio would grow to $3.91 million at 9.6% vs. only $1.74 million at 7.4%...This seemingly small difference in return is equally significant to younger investors accumulating assets. If you started with $5,000 and added that same amount every year for 40 working years, a return of 7.4% would give you a portfolio worth $1.19 million. If instead you earned 9.6%, you would wind up with $2.18 million — nearly twice as much.."
However, there is a catch according to Merriman, and this extra return isn't entirely free. When starting out, it may take a few hours to set up your portfolio and then maybe an hour to rebalance investments each year. If you invest for 40 years, maybe you spend 50 total hours working on your portfolio. If your reward for your efforts is $990,000 (the difference between a 7.4% return and 9.6% return - see above), that gives you $19,800 per hour of work. Hey, I think I'll take that.
