WHY YOUR PORTFOLIOS “CVR Number” Is Important
One of the most important lessons I want new investors to learn is that the first $100k is the hardest. In fact, your first million is the hardest. The reason for this is that you need to understand your portfolio's CVR number.
What the heck is a CVR number?
CVR stands for Contributions Versus Returns. It is a metric that I came up with to track my portfolios progress.
Contributions vs Returns = Percentage of Contributions/Percentage of Returns
You see, at the beginning of building any portfolio, your contributions are going to be the main driver of its growth. But over time, as compound interest starts to work its magic, your returns will become the major factor. This is the nature of compound interest, and why it is such a beautiful thing.
So, for new investors, it's crucial to learn patience, especially in the beginning. It may feel like you are going nowhere with your portfolio, when in reality, this is the process you have to follow to build wealth. The CVR number will guide you and show you the progress you are making.
We have an episode coming up that will utilize the above chart and discuss why your first million dollars is the hardest.
As you can see in the chart, your CVR adjusts every single year. Based on contributing $1000 per year at an 8% rate of return, in year one you have a 88/12 CVR. This means that 88% of your portfolio's returns came from your contributions, and 12% of your portfolio's returns came from compound interest.
As time goes on, this begins to level out.
In this example, your returns do not outweigh your contributions until year 11. Eleven years is a long time to wait, especially in investing terms.
Once your returns start to outweigh your contributions, that's when you make real progress. That's why your first million is the hardest because once you hit your first million dollars, there is a massive difference. Let me show you why.
Once you hit your first million dollars, 13% of your returns come from your contributions, and 87% (rounded up) of your portfolio comes from your returns.
The lesson here is to be patient. It gets better with time.
