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How much lower portfolio value do you end up with if you do not invest for a few years in between?

Posted on 24 Apr 2024
Author: Sayan Sircar

Tags: Portfolio Construction

6 mins read
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This article shows how to understand the impact on your portfolio if you stop investing for a few years between today and retirement.

How much lower portfolio value do you end up with if you do not invest for a few years in between?

📚 Topics covered:

Why take a break in the middle of investing?
What do you do with the money in the interim period?
Summarising the impact

Why take a break in the middle of investing?

In an ideal world, we will all be investing from the day we start our first job, increase the SIP amount year on year by 10%, get 15% returns like clock-work and then retire with crores in our portfolio.

However, we do not live in the ideal world.

Your Plans vs the Universe's Plans for You

Credit: http://thedoghousediaries.com/5468

As the excellent comic above clearly shows, plans and situations change that affect your goal-based investing journey:

family related: expenses for supporting family members for their education/marriage or emergencies, a special needs child or an unplanned large loan
job related: job loss, sabbatical or shift to a lower-paying career
health factors: a large expense or long-term illness of self or family member
asset related: purchasing a house via a home loan that makes you pause your SIP while the loan is paid off
bad financial decisions: get stuck in a real estate deal or lose money in trading that requires you to service a loan you do not want

There are good things that can happen as well like:

you take a break from your job to get a full-time degree like an MBA
you pause investing to buy a house

What do you do with the money in the interim period?

We will assume that the salary growth (or by proxy the investment growth) is uninterrupted. For example, at a 10% yearly step-up, and a 5-year break starting at Year 3, the investments done per year (starting at ₹5 lakhs/year at year 1) look like this:

Year	Yearly Investment (without break)	Yearly Investment (with break)
1	5.00	5.00
2	5.50	5.50
3	6.05	Stopped
4	6.66	Stopped
5	7.32	Stopped
6	8.05	Stopped
7	8.86	Stopped
8	9.74	9.74
9	10.72	10.72
10	11.79	11.79

We will have to see what happens to your portfolio at the end, at the 30-year point when you retire, due to investments not happening in the years marked “Stopped” in the table above.

In the table below, we assume what happens to an investor who:

invests every month and increases the yearly investment amount per year at 10%
the investments earn an average of 10% per year post-tax
the investments are paused for a period of 1 to 15 years (in the table this goes from left to right)
the stoppage happens sometime in the middle from Year 1 to Year 20 (in the table this goes from top to bottom)

The figure in the table shows the difference in the portfolio value in the two cases. For example:

if you stopped for 5 years at the Year 10 mark, your final portfolio value is 16.91% less
if you stopped for 10 years at the Year 5 mark, your final portfolio value is 34.18% less

Impact On Your Portfolio If You Stop Investing For A Few Years Between Today And Retirement

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Summarising the impact

One interesting observation in the table above is that the final portfolio value does not depend a lot on the time when you paused investing. You can see this trend very well by taking any column in the table above and moving from top to bottom. There is of course a larger impact of increasing the duration of the pause since, obviously, the longer you do not invest, the smaller will be the portfolio value.

Impact on final portfolio value when investments are stopped in the middle

The chart above summarises the observation and tells you the average lower portfolio value whenever you stop investing irrespective of when you stop investing:

if you take a 2-year break anytime to do an MBA, the portfolio is lower by around 7%. This is an excellent incentive for doing an MBA since your salary hike will be much higher which will like compensate for the break
if you take a 5-year break anytime to look after your family, the portfolio is lower by around 17%. A lot of parents go through this phase and it is important to keep updating yourself with marktable skills to ensure that you can come back to the workforce at your right salary level
if you take a 10-year break anytime to buy a house, the portfolio is lower by around 33%.

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