Broker Check

What is the MOST EFFECTIVE way to grow a retirement nest egg?

September 16, 2021

This week, I’d like to talk about what I think is the big secret to investing success.  We all see stories on the news about the start-up CEO that strikes a golden idea and gets rich, the cryptocurrency investors who strike gold and seemingly double their money every other week, and the Jim Cramer’s of the world who make a living telling you to “BUY BUY BUY” a stock and grow rich effortlessly (if you aren’t familiar with Jim Cramer, he hosts a finance show on CNBC and loves to hit a button that screams this at you).  I wish I could just tell all my clients to “listen to this one person’s advice” or “buy this one company” and they will instantly have all their wishes satisfied and be able to live luxurious lives free of worry.  Sadly, this simply isn’t the reality.  So, if there isn’t a “magic” investment that I can give to my clients, how do I coach them to reach their goals?  Often, it comes down to three things: understanding why the average investor generally fails, identifying what success means to them, and understanding the importance of time. 

“Do-It-Yourself” Investing and Why It Isn’t Often Effective

A study conducted by Dalbar in 2019 compared the average equity mutual fund investor’s returns to the S&P 500 Index, a main index composed of the top 500 stocks by size in the U.S.  The overall market return from 1999-2019 returned 6.06%, compounded annually, while the average investor’s return was 4.25%.  Why is this so significant?  Let’s give two investors, A and B, $100,000 each, and see what they would have earned over that period.  Investor A’s $100,000 in the funds they selected would have grown into $229,891 over that time frame, while Investor B’s investment in the market would have earned them $324,364, a difference of almost $100,000 over that period!  So, what’s the difference?  There are several factors I think contribute to a DIY investor underperforming.  On average, DIY investors tend to “buy high and sell low,” meaning they tend to buy stocks and funds that have had a stretch of gains and typically tend to sell off investments that have gone down, without doing the proper research into the security.  DIY investors also typically trade in and out of positions far more often, incurring higher trading costs and tax consequences that drag down the overall performance of their investments.  Often, DIY investors also have careers and families that require a large amount of time, which takes away from their ability to keep up with market trends and limits the time they have available to properly research an investment.

Success is a Sliding Scale

Investing success takes many different forms and means different things for every individual.  Some clients want to ensure a quiet retirement lifestyle and simply ensure they don’t run out of money and create hardship for their family; some want to purchase vacation timeshares, travel, and have assets available to them to be active; others want to leave a large inheritance to family or their favorite college or philanthropic activity.  One of the most important services that I provide to my clients is often just assisting them in identifying a simple goal in their life.  It is very common for me to ask a client what long-term goals they have and get a blank stare in response!  I believe that success in investing isn’t about having the most money at the end of the day; it’s about how many of those identified goals that someone is able to check off their list.  Knowing what success means to you and having a way to quantitatively measure in financial terms what it would mean to reach your measure of “success” helps you to have real expectations about your goals, which helps you to stay the course during your investing journey.

Time: The Most Important Resource an Investor Can Have

There is one currency the richest person in the world and the poorest person in the world have the same amount of: time.  Why is this especially true when we look at investing money?  Let’s compare two couples.  Our first couple both just turned 50 years old and their last child has left for college and they are now planning for retirements.  Our second are both 30 years old with children currently in grade school.  Both couples have the same income; however, couple A can afford to save $7,000/year for retirement while Couple B can only afford $3000/year.  Both couples have not saved for retirement at all up to this point in their lives.  And, just for good measure, let’s say that Couple A has a better return on their investments.  Couple A will earn an 9% return while Couple B are more conservative and will only earn 7% per year.  When Couple A reaches retirement at 65 (15 years), their $7000/year savings will have grown to $205,526, which is not bad for such a short period.  Couple B saved less per year, had a worse investment return, but had more time.  When Couple B reaches retirement at 65 (35 years), their $3000/year savings will have grown to $414,717, double what Couple A’s savings were, despite saving less than half per year what Couple A did and earning 2% less per year!

Overall, the most effective way to grow a great retirement nest egg is to start early!  Even a little bit early on in your adult lives makes a tremendous difference.  Knowing what your target is early on makes it easier to set up a plan to reach your goals.  Lastly, working with a financial professional that can help you plan your strategy and identify pitfalls can give you a tremendous leg up on reaching your late-life goals.  Thanks for taking the time to read the blog this week!  I would love the opportunity to sit down and discuss how I can help you improve your financial picture and reach your goals.  I specialize in creating focused, interactive plans for clients building wealth for retirement as well as managing those retirement plans to make sure my clients enjoy their retirement years to the fullest.  I also work with a variety of other financial issues!  If you would like to schedule a free consultation, please call the office at the number below, or click the link to schedule a virtual or in-person meeting (or phone call) by setting a time that works for you!  I would love to hear from you!  Enjoy the rest of your week!

Best wishes,

Mitch Bodenmiller

(937) 424-3269

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