2025 has gotten off to a rough start with devastating fires and corrections in stocks, bonds, and other risk assets. So, I thought it’d be a good idea to shift focus to some positives—before they fade as well. Take a moment to calculate your excess investment returns to remind yourself of the good times.
When times are good, we must celebrate our excess investment returns because we sure as heck aren't celebrating when times are bad. When times are bad, it can feel downright terrible due to a psychological concept called loss aversion. The pain of losing $10,000 often feels far worse than the joy of gaining $10,000.
When it comes to stocks, gains can vanish quickly since much of a stock’s valuation is based on investor confidence, which is notoriously fickle. If the outlook suddenly turns less optimistic, it can take a serious toll on your portfolio.
Here's how to recognize and enjoy your excess investment returns while maintaining financial discipline.
Calculate Your Excess Investment Returns and Celebrate
Here’s what I want every stock market investor to do right now to feel great about themselves:
- Calculate how much more your public stock holdings returned compared to the historical average.
- Determine what those excess returns could buy.
- Actually go out and treat yourself using a portion of those excess returns.
It's vital to celebrate your stock market wins because they represent the reward for delaying gratification—choosing to invest your savings rather than spending it immediately. When your delayed gratification yields positive returns, you should pat yourself on the back. And when your returns exceed expectations, you should celebrate even more!
Examples of Excess Investment Return Calculations
Here are three examples of individuals at different stages of their financial independence journey calculating their excess investment returns.
1. Just Getting Started
Let’s say your $10,000 stock market portfolio returns 23% for the year, or +$2,300. You invested everything in an S&P 500 ETF with no bonds. The historical annual return of the S&P 500 is 10%, meaning your excess return is 13%, or $1,300.
Celebrate this win by spending a small portion of your excess returns on perhaps a nice dinner or a new pair of shoes. It’s a meaningful way to reward yourself without jeopardizing your portfolio’s growth.
2. Close to Traditional Retirement Of 60-65
You have a 60/40 retirement portfolio worth $500,000 that grew by 14% this year, or +$90,000. Historically, a 60/40 portfolio returns about 9%, so your excess return is 5%, or $25,000.
Since this is your 401(k) and you’re still seven years away from age 59.5, you can’t tap into these profits without a 10% penalty. However, using your regular income, you might treat your spouse to a luxurious 7-day Hawaiian vacation at a 5-star resort. Go ahead and splurge on that $80 seafood buffet at The Kahala Resort too!
With another seven years of maxing out your 401(k) and averaging a 7% return, your portfolio could grow to over $1 million—a fantastic milestone for retirement readiness.
3. Hyper-Focused on FIRE
Imagine you’re 40 years old, working toward retiring by 45. You’ve built a $2 million taxable investment portfolio with an 80/20 stock/bond split by saving and investing 50% of your income for 18 years. This year, your portfolio returned 18%, compared to the historical return of 9.8%, resulting in an excess return of 8.2%, or $164,000.
You also own a $1 million rental property portfolio that appreciated 5%, 1% higher than the historical average. With a 50% loan-to-value ratio, your leveraged return is closer to 10%, adding another $60,000 in excess returns. Altogether, your excess returns total $224,000.
Why not celebrate by upgrading from your 20-year-old beater car to a new Honda Civic for $26,000? They look pretty sweet nowadays, especially the Sport edition. With a $3 million net worth, you’re free to enjoy this purchase guilt-free while still saving the majority of your gains.
Don't Spend All Your Excess Investment Returns
Spending 100% of your excess investment returns is risky because it eliminates your buffer when corrections and bear markets inevitably occur. Thankfully, calculations regarding the proper safe withdrawal rate in retirement and historical average returns of various portfolio compositions account for such corrections.
Since 1929, bear markets have occurred approximately every 4.8 years on average. A bear market is defined as a drawdown of 20% or more in any given year. Consequently, it’s crucial to retain some of your excess investment returns to shield your portfolio from these downturns. You're like a company that retains some of its earnings for difficult times.
Historically, bear markets have lasted about 10 months on average, though some, like the global financial crisis of 2007–2009, have persisted for a couple of years.
How Much of Your Excess Investment Returns to Spend
Given the history of bear markets, a prudent guideline is to spend 10% of your excess investment returns, with a maximum of 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 can cover your living expenses—or accumulate at least 25 times your annual expenses, you can adopt a dynamic safe withdrawal rate, irrespective of investment returns.
In retirement, this might mean withdrawing between 2% and 7% annually for the rest of your life. Studies have demonstrated that withdrawing at a rate up to 7% annually is sustainable for at least 30 years.
My Excess Investment Returns From 2024
I manage multiple investment portfolios and invest across various asset classes, including stocks, bonds, rental properties, private real estate, and venture capital. As a result, calculating excess investment returns is a little complicated, so I'll just choose one.
I decided to focus on my 401(k), which I maxed out for 13 years while working from 1999-2012 and later rolled over into an IRA. Since leaving work in 2012, I haven’t contributed a single dollar to the IRA because I’m unable to. This makes it the simplest investment to evaluate for measuring gains.
My rollover IRA delivered a 34% return in 2024, yielding an excess investment gain of 21% over the S&P 500 and 5% over the NASDAQ. I benchmark this portfolio against the NASDAQ since only about 21% of it is allocated to the S&P 500, with the remaining 79% invested in individual tech stocks and a tech-heavy ETF, QQQ. It's also highly volatile, having dropped 26% in 2022 versus -20% for the S&P 500.
The chart below reflects a 1-year change of 32%, rather than 34%, as the portfolio experienced a 2% drop—approximately $28,000—in the first few days of 2025. It's dated Jan 5, 2025 as I forgot to capture the end of the year balance. Easy come, easy go, baby!
A 5% excess gain over the NASDAQ translates to approximately $52,500 in additional returns.
What I Bought With My Excess Investment Returns
Given my guidance of spending between 10% to 20% of excess investment returns on life, I had a budget to spend $5,250 – $10,500. Here's what I purchased within two weeks, which is significantly more than what we normally spend on things we don't need:
- Economy Plus Flights To Oahu For Four: $3,000 – $700 after we got downgraded to Economy = $2,300
- Hawaiian food in Oahu for eight days in excess of what we'd normally eat: $800
- Two iPhone Pro 16 Max + all new cords, cases, dongles, and chargers, and upgraded my dad's old iPhone 7 to my iPhone Pro 12 Max: $2,700
- Shark automatic vacuum cleaner: $350
- Three Cincom hand massagers for Christmas presents to my sister, aunt, and parents: $240
- Two mid-range car seats to be left in Oahu at my parent's house: $180
- Assortment of presents for our kids: $150
- New sports jacket with zipper pockets: $130
- New tennis/pickleball shoes: $160
- Box of Warm eye masks to help with dry eyes: $35
- Pokémon Go coins for my wife and me: $30
Grand total: $7,075
By focusing on spending excess investment returns, I was able to overcome my frugality and spend more aggressively. However, given I only spent ~13% of my excess investment returns, I am still not effectively decumulating wealth. Only a disaster or a bear market can effectively do that.
That said, I felt great spending money on the above items because I genuinely value them all. I just don't have anything more to spend money on at the moment.
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The Power Of Compounding Is Incredible
Another key takeaway from my excess investment returns is the incredible power of compounding. Over 13 years, I maxed out my 401(k) contributions and benefitted from company matching, growing my balance to approximately $380,000 by the time I retired in 2012.
Fast forward to today, and my now rolled-over 401(k) returned about $360,000 in just one year—almost equal to my entire 13-year career contributing. Again, this happened with zero additional contributions or company profit sharing.
The sheer magnitude of this compounding effect is mind-blowing and partly inspired my post on why it’s possible to make more in retirement than during your working years. Hence, please save and invest aggressively while you're young to give the compounding more time to work for you.
Enjoy Some Of Your Investment Gains
I hope everyone enjoyed this fun exercise on how to responsibly enjoy some of our investment winnings. Remember, the ultimate goal of investing is to enhance our quality of life—not to die with an unspent fortune.
Bad times will inevitably come again. When they do, we can rely on the 80%–90% of our excess investment returns that we didn’t spend to help cushion the losses.
Even after investing since 1996, I still find it remarkable that we can put our money into assets, let time do its thing, and potentially make money without active effort. To me, any returns above the risk-free rate of return feel like free money.
If you haven’t started investing yet, there’s no better time than today. Check out my asset allocation guide for stocks and bonds and my net worth asset allocation guide for different types of people to get started.
Happy investing—and happy spending!
Diversify Into Private Real Estate And Venture
If you want to dampen the volatility of your stock portfolio, I suggest diversifying into real estate—an investment that combines the income stability of bonds with greater upside potential.
Consider Fundrise, a platform that allows you to 100% passively invest in residential and industrial real estate. With about $3 billion in private real estate assets under management, Fundrise focuses on properties in the Sunbelt region, where valuations are lower, and yields tend to be higher.
I’ve personally invested over $300,000 with Fundrise, and they’ve been a trusted partner and long-time sponsor of Financial Samurai. With a $10 investment minimum, diversifying your portfolio has never been easier.
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I have put off major purchase the past few years to do more investing in my stock and real estate portfolio. If I can max out before retirement then I can live better than today.
Your post is a timely reminder to appreciate our investment victories, especially during a challenging start to 2025. Focusing on excess investment returns is a fantastic way to boost morale and stay disciplined despite market volatility.
The psychological concept of loss aversion you highlighted is key. It’s true—losing feels worse than gaining feels good. By celebrating our gains, we counterbalance that negativity and reinforce positive investing behaviors.
Your examples cater to a broad audience, offering practical ways to enjoy gains responsibly. Whether it’s a small treat or a significant splurge, these moments of celebration remind us why we invest: to improve our quality of life. It’s refreshing to see a financial strategy that emphasizes both discipline and enjoyment.
Your suggestion to spend only 10%-20% of excess returns is sound advice. It ensures we celebrate without compromising future stability—a perfect balance for long-term success.
Additionally, your tip to diversify into real estate through platforms like Fundrise offers a useful way to mitigate stock market volatility. This diversification strategy helps investors maintain steady growth even during market downturns.
Here’s an extra tip: Set a reward threshold for future gains. For example, decide in advance that once your portfolio achieves a certain return, you’ll allocate a portion to something meaningful—be it a vacation, a gadget, or an experience. This not only motivates you to stay invested but also ensures you enjoy the journey, not just the destination.
Thank you for sharing this uplifting perspective. Celebrating our financial wins, even during uncertain times, is a powerful way to stay positive and focused on our long-term goals.
Are you suggesting to sell off 10%-20% of your gains? This is an interesting approach.
Yes, or use your cash flow / income to spend up to 10% – 20% of your gains, so you don’t have to sell any stocks (see bottom section of my post). The idea is to be more purposeful in enjoying your winnings when times are good b/c times won’t always be good.
This is a fun approach and one I think about a lot. Should I sell and enjoy unrealized gains? Have not done it before but may consider it. Looks like you spent closer to 5% though. What do you have planned for more fun :)
Hawaii was amazing and is my favorite place on earth. So probably more Hawaii trips!
It’s one thing to see the numbers go up on a screen, but it’s another when you exchange a bit of it for something tangible.
I recently splurged on some furniture to celebrate my “excess” win. It did not feel good to see the balance go down in my brokerage account after hitting the withdraw button, but once the furniture arrived, it felt really good to see it being used daily.
This is a great post. Let me tell you about my excess returns philosophy. I give myself a bonus, based on the 2/20 rule applied by most active hedge funds. So, the bonus is calculated at 2% of my liquid net worth plus 20% of annual returns. This is pretty close to you max of 20% and it gives me something, even in the worst years. Practically, I rarely spend it, I can’t think of things to purchase that make sense. However, it gives me a nice feeling that I can spend up to my bonus in any given year and food for thought
I like that framework of paying yourself 2 and 20 like hedge funds managers and VCs! And if we don’t reach the higher watermark, we don’t get paid a percentage of profits.
This is a great philosophy to lean on when times are ugly. I have a habit of totally avoiding looking at my portfolio losses because it gets me too upset. The knock on effect is I don’t end up looking at my portfolio gains either. I tend to only login to my accounts when I have cash I’m ready to deploy that day. In a way it keeps my numb because I avoid looking at the portfolio size, I just look at the cash available balances and place buy trades. It prevents me from feeling tempted to sell at losses, but it also prevents me from celebrating and appreciating when there are gains.
I like your approach on actively calculating excess returns and enjoying some of the proceeds. Nicely done on your celebration list!
Not looking, buying, and holding for the long-term, is a great approach. It’s an approach. I wish I had more of.
Unfortunately, I am kind of obsessed with personal finances and investing, so I can help but check often.
But also, I am responsible for our family finances. So to not do constant updates and reviews would feel irresponsible, especially since we don’t have steady income.