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The concept of critical mass
Old 04-25-2014, 10:28 AM   #1
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The concept of critical mass

I've read on here a number of posts commenting about how a certain person's portfolio is close to or has reached "critical mass." I'm curious as to how people define that and what they mean when they use this term.

I don't think it's equivalent to "FI." I think it's more along the lines of you're at the point where compounding (or just annual returns) have a greater impact on your portfolio than your savings rate.

In other words, if Investor X is saving $50,000 per year, and his portfolio reaches, say, $700,000, an "average year" return of 7% means he's earning $49,000 with no action, and thus he has reached "critical mass." Any growth after that and his returns have a greater (average) impact than his savings rate. (I hope to get here someday soon!!)

What do you call "critical mass?"
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Old 04-25-2014, 10:44 AM   #2
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...he has reached "critical mass." Any growth after that and his returns have a greater (average) impact than his savings rate. (I hope to get here someday soon!!)...
The problem I have seen is that in bad years, the portfolio shrinkage is also many times greater than what I could put in to stem the shriveling. I had 60c on the dollar from 2000 to 2003. Luckily, I got it all back by early 2005, but it was unnerving.
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Old 04-25-2014, 10:49 AM   #3
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The problem I have seen is that in bad years, the portfolio shrinkage is also many times greater than what I could put in to stem the shriveling. I had 60c on the dollar from 2000 to 2003. Luckily, I got it all back by early 2005, but it was unnerving.
Sure, that's an implied "problem," but I guess when I wrote my off-the-cuff definition of this term, that's why I used "average." In a year like 2013, with 30% portfolio returns, a lot of us were probably at "critical mass!" And in other years, your savings can't keep your overall balance stable after a certain point (dependent on your savings rate).
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Old 04-25-2014, 10:53 AM   #4
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Doesn't mean much to me, and even FI is subject to considerable interpretation, there's no universally right FI either.

Here's a definition from a well known radio " advisor" who evidently uses the term often, but it's about as vague as I could imagine. Sounds a lot like FI to me, vs another unique metric...
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Critical Mass:

A state of freedom from worry and anxiety about money due to the accumulation of assets which make it possible to live your life as you choose without working if you prefer not to work or just working because you enjoy your work but don't need the income. Plainly stated, the Land of Critical Mass is a place in which individuals enjoy their own personal financial nirvana. Differentiation between earned income and assets is a fundamental lesson to learn when thinking in terms of critical mass. Earned income does not produce critical mass......critical mass is strictly a function of assets.
Bob Brinker's Land of Critical Mass : bobbrinker.com Marketimer © Moneytalk Bob Brinker
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Old 04-25-2014, 10:59 AM   #5
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My definition of critical mass is that my pile of financial resources reaches the point where I don't have to work unless I want to. Obviously, included in critical mass is a phantom value for my platinum plated pine and brass pension.
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Old 04-25-2014, 11:10 AM   #6
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I guess critical mass for me was when it became clear that the incremental savings I was adding to the pile were largely besides the point.
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Old 04-25-2014, 11:20 AM   #7
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I've been using it my own mind to define current situation: portfolio growth plus pension and SS spins off more that we have the ability to spend, hence critical mass in that it will outgrow our ability to spend it. After all those years of LBYM dollars still have inherent value that makes us unable to spend it on things that don't mean much to us, which is just about anything material. We're at 2-2.5% WR. I'd say anyone living comfortably (not denying themselves things they really would enjoy) at much less than 3.5% WR to have hit my definition of "critical mass."
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Old 04-25-2014, 11:34 AM   #8
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I guess critical mass for me was when it became clear that the incremental savings I was adding to the pile were largely besides the point.
Pretty much what my definition says, only much more succinct!
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Old 04-25-2014, 11:53 AM   #9
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I am extremely wary of using terms like "critical mass" in connection with my investments. It's self deception to think that a portfolio of any size can achieve the kind of explosive and uncontrolled growth one sees in, for example, a critical mass of U-235. Applying borrowed terms like this to their financial situation gives investors a false sense of confidence that isn't borne out by the facts.
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Old 04-25-2014, 12:11 PM   #10
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I defined my critical mass as the minimum that I can RE with. So, CM = starting point of FI. E.g, I've reached CM already and evey year I do OMY, it's increasing/enhancing my FI.
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Old 04-25-2014, 01:19 PM   #11
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I guess critical mass for me was when it became clear that the incremental savings I was adding to the pile were largely besides the point.
+1. To me, it was that point at which it seemed that the "pot's" self-generated growth was much more significant than the growth due to additions. More important from a psychological perspective than a real one, since its very dependent on market performance if there are lot of equities in the portfolio.
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Old 04-25-2014, 01:22 PM   #12
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When I was the accumulation phase I considered having reached critical mass when the growth in my investments for the year (excluding contributions) exceeded my annual income.
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Old 04-25-2014, 02:14 PM   #13
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For me I guess critical mass was when FIRECALC, Fidelity RIP and Financial Engines all gave >95% probability of not running out of money with an initial 3% WR on a planned retirement date. This takes into account future pensions and SS, not just a sum of invested money.
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Old 04-25-2014, 02:14 PM   #14
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Should we not worry about crossing the "critical mass" mark in the other direction, meaning when the market tanks and our WR suddendly increases way beyond the 3.5% mark, that there's a real risk of the portfolio "imploding"? The incredible shrinking portfolio?

Hey, I do not think I have ever been accused of being an optimist.
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Old 04-25-2014, 03:18 PM   #15
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I've always used "critical mass" as a reference to the size of your FIRE portfolio when it and your other financial resources allow you to be FI.

Say at some pre-retirement age you can accurately estimate your future SS and pension. You have a FIRE portfolio to supplement those sources. When that portfolio has reached a size where your chosen WR, in addition to future income sources such as SS and pension, will support your budget for the rest of your life, you've reached critical mass.

When Mega Corp sent my sorry ass skidding across the parking lot (big security guard that didn't know his own strength) back in 2006, I went home and spent a week figuring out whether I was at critical mass or whether I needed to find another job. I was at critical mass so "fired" became "FIRE'd."
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Old 04-25-2014, 03:34 PM   #16
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To me, critical mass means having enough such that you can live comfortably off of your financial assets such that you do not have to work if you don't want to.

I think this is generally in the spirit of the Bob Brinker definition, though articulated a little more simply.
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Old 04-25-2014, 04:01 PM   #17
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Critical Mass
: Critical mass is the amount of fissile material needed to sustain nuclear fission. More generally, "critical mass" is similar to the tipping point concept.

Tipping Point: A tipping point is an example of hysteresis in which the point at which an object is displaced from a state of stable equilibrium into a new equilibrium state qualitatively dissimilar from the first.

Hysteresis: Hysteresis is the dependence of the output of a system not only on its current input, but also on its history of past inputs. The dependence arises because the history affects the value of an internal state. To predict its future outputs, either its internal state or its history must be known.

Hysteresis is the dependence of the output of a system not only on its current input, but also on its history of past inputs. The dependence arises because the history affects the value of an internal state. To predict its future outputs, either its internal state or its history must be known.

This sounds very much like a FI portfolio to me.

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Old 04-25-2014, 04:11 PM   #18
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Originally Posted by NW-Bound View Post
Should we not worry about crossing the "critical mass" mark in the other direction, meaning when the market tanks and our WR suddendly increases way beyond the 3.5% mark, that there's a real risk of the portfolio "imploding"? The incredible shrinking portfolio?

Hey, I do not think I have ever been accused of being an optimist.
Are you being a grouchy geezer today?
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Old 04-25-2014, 04:54 PM   #19
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To me, critical mass means having enough such that you can live comfortably off of your financial assets such that you do not have to work if you don't want to.

I think this is generally in the spirit of the Bob Brinker definition, though articulated a little more simply.
+1. Sounds good to me!
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Old 04-25-2014, 05:11 PM   #20
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I remember listening to Bob Brinker's radio show many years ago. He'd talk about this concept called critical mass and to the best of my knowledge, it was having enough of money where you could live off it for the rest of your life. But I never remember him really quantifiably defining it. To me, it is similar to being FI. I never liked the term critical mass and prefer financially independent. But I do give him credit because listening to him did get me to start thinking about how could I achieve "critical mass" so I could stop working. This was long before the "early retirement" forum was around. So the seed was planted long ago.
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