Has it Reached Critical Mass?

by Investing School on September 12, 2011

The concept of critical mass is one that comes to us from nuclear physics. Critical mass is the smallest amount of mass which can sustain a nuclear reaction at a constant level. How does this apply to financial situations? In the business world it is considered to be the point at which a company becomes self sustaining and viable.

This is the point at which the business will no longer require additional investment to maintain itself. From the investor’s point of view, this might be when dividends start to appear on the horizon.

From the perspective of your portfolio, critical mass is the point at which your investments become self sustaining after you have made all withdrawals and paid taxes. The advantage here is clear. When you start looking at retirement you should ideally have sufficient investments that you can live off of the interest and dividends without tapping the capital. That way, it won’t matter how long you live, you won’t run out of money.

Whether speaking about a nuclear reaction, the state of a business or your personal finances, critical mass is a desirable thing. In all situations the concerns over perpetuity are gone and the focus can change to other, hopefully more pleasant, things.

It pays to spend some time evaluating your needs and determining what your critical investment mass would be depending upon when you want to retire, and what you want to accomplish at that point. Critical mass would be dramatically different for a couple wishing to travel several times a year and an individual who looks forward to spending time gardening and remaining at home.

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