When times are good, we should celebrate our excess investment returns because we sure as hell don’t celebrate when times are bad! When times are bad, it can be downright terrible because of a psychological concept called… Loss aversion. The pain of losing $10,000 is often much worse than the pleasure of winning $10,000.
For this reason, it’s important to balance the scales by celebrating more when we experience investment victories. This mindset becomes more important as we get older and face death. Here’s how to recognize and enjoy excess investment returns while maintaining financial discipline.
Calculate and celebrate your excess investment returns
Here’s what I want every stock market investor to do right now to feel better about themselves:
- Calculate how much your overall stock holdings have returned compared to the historical average.
- Determine what those excess returns can buy.
- In fact, go out and enjoy a portion of those excess returns.
It’s important to celebrate your stock market victories because they represent a reward for delaying gratification – choosing to invest your savings rather than spending them immediately. When your delayed gratification leads to positive returns, you should pat yourself on the back. And when your returns exceed expectations, you should celebrate even more!
Examples of excess ROI calculations
Below are three examples of individuals at different stages of their financial independence journey calculating their excess investment returns.
1. Just get started
Let’s say your $10,000 stock market portfolio returns 23% for the year, or +$2,300. I invested everything in the S&P 500 ETF without bonds. The historical annual return for the S&P 500 is 10%, which means your excess return is 13%, or $1,300.
Celebrate this win by spending a small portion of your excess proceeds on a nice dinner or a new pair of shoes. It’s a useful way to reward yourself without jeopardizing your portfolio growth.
2. Close to traditional retirement for 60-65 year olds
You have a 60/40 retirement portfolio of $500,000 that has grown 14% this year, or $90,000+. Historically, a 60/40 portfolio returns about 9%, so your excess return is 5%, or $25,000.
Since this is your 401(k) and you still have seven years before you turn 59.5, you can’t take advantage of these earnings without a 10% penalty. However, using your regular income, you can give your spouse a 7-day luxury vacation in Hawaii at a 5-star resort. Go ahead and enjoy the $80 seafood buffet at Kahala Resort too!
With seven more years of maxing out your 401(k) and an average return of 7%, your portfolio could grow to more than $1 million — a great milestone for retirement readiness.
3. Excessive focus on fire
Imagine you are 40 years old, working to retire by 45. You’ve built a $2 million taxable investment portfolio with an 80/20 stock/bond split by saving and investing 50% of your income for 18 years. This year, your portfolio returned 18%, compared to the historical return of 9.8%, resulting in an excess return of 8.2%, or $164,000.
You also own a $1 million rental property portfolio that appreciates at 5%, 1% higher than the historical average. With a 50% loan-to-value ratio, your leverage return is closer to 10%, adding another $60,000 in excess returns. In total, your excess returns total $224,000.
Why not celebrate upgrading from your 20-year-old beater to a new Honda Civic for $24,000? She looks so sweet these days. With a net worth of $3 million, you can enjoy this purchase guilt-free while keeping the majority of your gains.
Don’t spend all your excess investment returns
Spending 100% of your excess investment returns is risky because it eliminates the buffer when corrections and bear markets inevitably occur. Calculations regarding the appropriate safe withdrawal rate in retirement and average historical returns for different portfolio compositions already account for such corrections.
Since 1929, bear markets have occurred about every 4.8 years on average. A bear market is defined as a drawdown of 20% or more in any given year. Therefore, it is necessary to retain some excess investment returns to protect your portfolio from these downturns. You are like a company that keeps some of its profits during difficult times.
Historically, bear markets lasted about 10 months on average, although some, such as the global financial crisis of 2007-2009, lasted a few years.
How much of your excess investment goes back to spending
Given the history of bear markets, a wise guideline is to spend 10% of excess investment returns, with Maximum 20%. This approach allows you to celebrate your gains during the good times while maintaining a safety net against the inevitable market downturn.
Once you achieve financial independence – when your passive income can cover your living expenses – or accumulate at least 25 times your annual expenses, you can adopt a dynamic safe withdrawal rate, regardless of investment returns.
In retirement, this might mean withdrawing between 2% and 7% annually for the rest of your life. Studies have shown that withdrawal at a rate of up to 7% annually is sustainable for at least 30 years.
My excess investment returns from 2024
I manage multiple investment portfolios and invest across various asset classes, including stocks, bonds, rental properties, private real estate and venture capital. As a result, calculating excess investment returns is a bit complicated, so I’ll just choose one.
I decided to focus on my 401(k), which I maxed out for 13 years while working from 1999-2012 and later moved to an IRA. Since I left work in 2012, She did not contribute a single dollar to the IRA Because I can’t. This makes it the simplest investment to evaluate to measure gains.
My Revolving IRA has a 34% return in 2024, resulting in trailing investment gains of 21% over the S&P 500 and 5% over the Nasdaq. I measure this portfolio against the Nasdaq where only about 21% of it is allocated to the S&P 500, with the remaining 79% invested in individual technology stocks and high-tech ETFs, QQQ. It is also highly volatile, down 26% in 2022 versus -20% for the S&P 500.
The chart below reflects a one-year change of 32%, rather than 34%, as the portfolio saw a 2% decline — ~$28,000 — in the first few days of 2025. At the time of this post, the portfolio was down another ~$30,000 since January 5.
The 5% excess profit on the Nasdaq translates into additional returns of about $52,500.
What you bought with excess investment returns
Given my guideline to spend 10% to 20% of my excess investment returns on life, I had a spending budget of $5,250 to $10,500. Here’s what I bought in two weeks, which is a lot more than we usually spend:
- Economy Plus flights to Oahu for 4 people: $3,000 – $700 after we were downgraded to economy = $2,300
- Hawaiian food on Oahu for eight days is more than what we normally eat: $200
- My iPhone Pro 16 Max + all new cords, cases, connectors, and chargers, and I upgraded my dad’s old iPhone 7 to an iPhone Pro 12 Max: $2,700
- Shark Automatic Vacuum: $400
- three Syncom hand massager Christmas gifts for my sister, aunt, and parents: $240
- Two mid-range car seats will be left on Oahu at my parents’ house: $180
- Gift set for our kids: $150
- New Sport Jacket with Zippered Pockets: $130
- New tennis/pickleball shoes: $160
- box of Warm eye masks To help treat dry eyes: $35
- Pokémon Go coins for me and my wife: $30
grand total: $7,025
By focusing on spending excess investment returns, I was able to conquer saving and spending more aggressively. However, since I only spent 13% of my excess investment returns, I still could not accumulate my wealth effectively. However, I felt very comfortable spending money on the above items because I really appreciated them all. I don’t have anything else to spend money on.
The strength of the installation is incredible
Another key point of excess investment returns is the amazing power of compounding. Over the course of 13 years, I maxed out my 401(k) contributions and took advantage of the company match, growing my balance to about $380,000 by the time I retired in 2012.
Fast forward to today, and my now rolled over 401(k) has returned about $360,000 in just one year — nearly my entire 13-year career contribution. Again, this happened without any additional contributions or participation in the company’s profits.
The sheer magnitude of this compounding effect is astounding and partly inspired my post on why you can achieve more in retirement than in your working years. Hence, please save and invest aggressively when you are young to give the compound more time to work for you.
Please enjoy some of your investment gains
I hope everyone enjoys this fun exercise in how to responsibly enjoy some of our investment profits. Remember, the ultimate goal of investing is to improve our quality of life, not to die with unspent wealth.
Bad times will inevitably come again. When they do, we can count on the 80% to 90% of our excess investment returns that we didn’t spend to help mitigate losses.
Even after investing since 1996, I still find it wonderful that we can invest our money in assets, let time do its job, and possibly make money without actively putting in effort. To me, any returns above the risk-free rate of return look like free money.
If you haven’t started investing yet, there’s no better time than today. Check out my Asset Allocation Guide for Stocks and Bonds and my Net Asset Allocation Guide for Different Types of People to get started.
Happy investing, happy spending!
Diversification into private real estate and projects
Stocks and bonds are classic staples of retirement investing. However, I also suggest diversifying into real estate, an investment that combines the stability of bond income with greater upside potential. I’m also bullish on investing in private growth companies since private companies stay private longer.
It is considered Fundraisinga platform that allows you to invest 100% passively in residential and industrial real estate. With about $3 billion in private real estate assets under management, Fundrise focuses on properties in the Sunbelt region, where valuations are lower and returns tend to be higher.
With the Federal Reserve embarking on a multi-year interest rate cutting cycle, demand for real estate is expected to grow in the coming years. At the same time, the IPO market and takeover activity for private companies is likely to rebound thanks to strength in the stock market.
I have personally invested over $300,000 with Fundrise, and they have been a trusted partner and long-time sponsor of Financial Samurai. With a minimum investment of $10, diversifying your investment portfolio is easier than ever.
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