The concept of critical mass

[nash031]

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?"

 

[NW-Bound]

...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.

 

[nash031]

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).

 

[Midpack]

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...

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

 

[Chuckanut]

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.

 

[brewer12345]

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.

 

[H2ODude]

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."

 

[nash031]

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!

 

[karluk]

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.

 

[robnplunder]

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.

 

[samclem]

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.

 

[REWahoo]

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.

 

[Alan]

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.

 

[NW-Bound]

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.

 

[youbet]

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."

 

[truenorth418]

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.

 

[Huston55]

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.

Man, do I love Wikipedia!

 

[robnplunder]

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?

 

[scrabbler1]

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!

 

[David1961]

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.

 

[nash031]

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.

Interestingly, as a nuclear engineer, critical mass as defined in our world is more akin to the definition I used, rather than FI.

FI, to me, means you have enough money that you don't need to work in order to sustain your lifestyle.

Critical mass, as we use it describing a portfolio and as it's applied in the nuclear field, would mean more along the lines of my original definition: specifically adding more to your portfolio has less effect than compounding returns. The portfolio is "critical" in the way that a reactor is "critical": the "reaction" is occurring without the need of outside influence (withdrawing control rods (adding positive reactivity) in a reactor vs. adding more money in a portfolio)).

Sure you can add more money (reactivity), but even if you didn't the problem would "solve itself" (you'd reach FI/the reactor is self-sustaining).

Thus, most of us probably reach portfolio "critical mass" before we reach FI, and one is not necessarily linked to the other.

But I can see how one would say it's the same as FI since the goes-ins equal the goes-outs in a critical reactor as well (FI!). I guess I'm applying "critical mass" to a portfolio in the accumulation phase only!

/nerd

 

[NW-Bound]

Are you being a grouchy geezer today?

You have to ask me that on a day when the Dow dropped 140 points and the Nasdaq lost 1.75%?

 

[Major Tom]

I never thought of critical mass as having an exact numerical definition, but referring generally to the point past which in an average year, portfolio growth was due far more to investment gains than to contributions. In other words, what brewer and a few others have said.

But hey - define it however you want to.

 

[CyclingInvestor]

For me "critical mass" meant the same as FI - that I could comfortably live on the dividend stream that my portfolio generated. This was about 2 years before I retired.

 

[nash031]

Seems like there are just two opinions:

- It means "FI."

- It means the point past which in an average year, portfolio growth was due far more to investment gains than to contributions.

I'll just stick with the second!