When things are good, we must celebrate our excess return on investment, because when things are bad, we certainly won’t! When things go badly, due to a condition called ” loss aversion. The pain of losing $10,000 is often much greater than the pleasure of gaining $10,000.
In the case of stocks, gains can disappear quickly because stock valuations largely depend on investor confidence. If the outlook suddenly becomes less positive, it could have serious consequences for your investment portfolio.
Because of this, it’s crucial to balance the scales by celebrating harder when we experience investment wins. This mindset becomes even more important as we age and face our own mortality. Here’s how to recognize and enjoy superior investment returns while maintaining financial discipline.
Calculate your excess return on investment and celebrate
To feel good about yourself, here’s what I want every stock market investor to do right now:
- Calculate how much the returns on your public stock holdings have increased compared to historical averages.
- Determine what these excess returns can buy.
- In fact, use some of those excess gains to go out and treat yourself.
Celebrating your stock market wins is crucial because they represent the rewards of delayed gratification—choosing to invest your savings rather than spending it right away. When your delayed gratification leads to positive rewards, you should give yourself a pat on the back. When your returns exceed expectations, you should celebrate even more!
Example of calculation of excess return on investment
Here are three examples of individuals at different stages of their financial independence journey calculating excess investment returns.
1. At the beginning
Let’s say your $10,000 stock market portfolio returned 23% this year, or +$2,300. You invest all your money in the S&P 500 ETF, but no bonds. The S&P 500’s historical annual return is 10%, which means your excess return is 13%, or $1,300.
Celebrate this win by spending a small portion of your excess earnings on a nice dinner or a new pair of shoes. This is a meaningful way to reward yourself without jeopardizing the growth of your portfolio.
2. Close to the traditional retirement age of 60-65 years old
You have a 60/40 retirement portfolio worth $500,000 that has grown 14% this year, or +$90,000. Historically, a 60/40 portfolio has returned about 9%, so your excess return is 5%, or $25,000.
Since this is your 401(k) and you are 7 years away from age 59.5, you can’t take advantage of those profits without the 10% penalty. However, you can tap into your regular income and treat your spouse to a seven-day luxury Hawaiian vacation at a five-star resort. Come and indulge in the $80 seafood buffet at Kahala Resort!
In another seven years, your 401(k) will be maxed out and earning an average 7% return, and your portfolio could grow to over $1 million, a fantastic milestone for retirement preparation.
3. Pay close attention to fire
Imagine you are 40 years old and trying to retire at 45. This year, your portfolio returned 18%, compared with the historical return of 9.8%, for an excess return of 8.2%, or $164,000.
You also own a $1 million rental property portfolio that has appreciated 5%, 1% above the historical average. At a 50% loan-to-value ratio, your leverage return is nearly 10%, adding an additional $60,000 in excess return. Your excess return totals $224,000.
Why not celebrate by spending $24,000 to upgrade from your 20-year-old car to a new Honda Civic? They look so sweet now. With a net worth of $3 million, you can enjoy this purchase guilt-free while still saving the majority of the proceeds.
Don’t spend all your excess investment returns
Spending 100% of excess investment returns is risky because it eliminates your cushion when corrections and bear markets inevitably occur. Calculations regarding appropriate safe withdrawal rates in retirement and historical average returns for various investment portfolios already take this correction into account.
Since 1929, bear markets have occurred approximately every 4.8 years on average. A bear market is defined as a retracement of 20% or more in any one year. Therefore, it is critical to retain some excess investment returns to protect your portfolio from economic downturns. You’re like a company that retains some of its earnings during hard times.
Historically, bear markets have lasted about 10 months on average, but some, such as the global financial crisis from 2007 to 2009, have lasted several years.
How much of your excess investment will you get in return?
Given the history of bear markets, a prudent guideline is to spend 10% of excess investment returns, Up to 20%. This approach allows you to celebrate your gains during good times while preserving a safety net for inevitable market downturns.
Once you achieve financial independence (when your passive income covers your living expenses) or accumulate at least 25 times your annual expenses, you can adopt a dynamic safe withdrawal rate without regard to investment returns.
In retirement, this could mean withdrawing 2% to 7% per year for the rest of your life. Studies show that withdrawal rates as high as 7% per year can last at least 30 years.
My excess return on investment in 2024
I manage multiple portfolios and invest in a variety of asset classes, including stocks, bonds, rental real estate, private real estate, and venture capital. So the calculation of excess investment income is a bit complicated, so I will just choose one.
I decided to focus on my 401(k), which I used for a maximum of 13 years at work, from 1999 to 2012, before being rolled over to an IRA. Since resigning in 2012, Never donated a dollar to an IRA Because I can’t do it. This makes it the easiest investment to evaluate a measure of returns.
My rollover IRA delivered a 34% return in 2024, 21% better than the S&P 500 and 5% better than the Nasdaq. I compare this portfolio to the Nasdaq, as only about 21% of it is allocated to the S&P 500, with the remaining 79% invested in individual technology stocks and the tech-heavy ETF QQQ. It’s also highly volatile, down 26% in 2022, compared with the S&P 500’s -20% loss.
The chart below reflects a one-year change of 32%, not 34%, because the portfolio fell 2% (~$28,000) in the first few days of 2025. Since then, it has increased by about $40,000!
A 5% excess return relative to the Nasdaq is equivalent to an additional return of approximately $52,500.
What did I buy with excess return on investment?
Given that my guidance is to spend 10% to 20% excess return on investment, my budget is $5,250 to $10,500. Here’s what I bought in two weeks, which is a lot more than we usually spend:
- Economy flight for four to Oahu: $3,000 – $700 downgrade to economy = $2,300
- More Hawaiian food than we usually eat in eight days on Oahu: $200
- Two iPhone Pro 16 Max + new power cables, cases, adapters and chargers and upgrade my dad’s old iPhone 7 to my iPhone Pro 12 Max: $2,700
- Shark automatic vacuum cleaner: $400
- Three Cincom hand massagers as Christmas gifts for my sister, aunt, and parents: $240
- Two mid-range car seats left at my parents’ house on Oahu: $180
- Assorted gifts for kids: $150
- New track jacket with zippered pockets: $130
- New tennis/pickleball shoes: $160
- Box of warm eye masks to help relieve dry eyes: $35
- Pokémon Go coins for my wife and I: $30
Grand total: $7,025
By focusing on spending excess investment returns, I was able to overcome my frugal habits and spend my money more aggressively. However, considering I only spent 13% of excess investment returns, I still wasn’t building wealth effectively. That said, I feel great spending money on the above items because I truly value them. I just don’t have any more money to spend.
The power of compound interest is incredible
Another big takeaway I got from outsized investment returns is the incredible power of compound interest. For 13 years, I maxed out my 401(k) contributions and benefited from the company match, growing my balance to about $380,000 by the time I retired in 2012.
Fast forward to today, and my 401(k) has returned about $360,000 in just one year, nearly as much as my entire 13-year career. Again, this occurs with zero additional contribution or profit sharing from the company.
The magnitude of this compounding effect is astounding, and partially inspired me to publish this article explaining why you can make more money in retirement than during your working life. So save and invest aggressively while you’re young to give compound interest more time to work for you.
Please enjoy some of your investment returns
I hope everyone enjoyed this fun exercise on how to responsibly enjoy some of the benefits of our investments. Remember, the ultimate goal of investing is to improve our quality of life, not to die with unspent wealth.
Bad times inevitably come again. When they do, we can rely on 80%–90% of our unspent excess investment returns to help cushion losses.
Even with investing since 1996, I still find it amazing that we can put money into assets, let time do its thing, and potentially make money without any active effort. To me, any return above the risk-free rate feels like free money.
If you haven’t started investing yet, there’s no better time than today. Check out my stock and bond asset allocation guides and net worth asset allocation guides for different types of people to get started.
Happy investing – happy consumption!
Diversify into private real estate and venture capital
Stocks and bonds are classic staples of retirement investing. However, I also recommend diversifying into real estate—an investment that combines the income stability of bonds with greater upside potential. I’m also positive about investing in private growth companies, given that they stay private longer.
consider Fund risesa platform that allows you to invest 100% passively in residential and industrial real estate. Fundrise manages about $3 billion in private real estate assets and focuses on properties in the Sunbelt region, which has lower valuations but tends to have higher yields.
As the Federal Reserve begins a multi-year cycle of interest rate cuts, real estate demand is expected to grow in the coming years. At the same time, the IPO market and acquisition activity for private companies are likely to pick up as the stock market strengthens.
I have personally invested over $300,000 in Fundrise and they have been a trusted partner and long-term sponsor of Financial Samurai. With a minimum investment of $10, diversifying your portfolio has never been easier.
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