Sometimes it seems like Americans have lost the ability to do hard things. And by hard things, I mean most anything that takes more than about one week of time and self-discipline.
Even when we set an admirable goal, we want a quick and easy path to that objective. When one method fails to deliver fast enough, we’re on to the next. We are always searching for that one-shot/one-kill silver bullet.
Nowhere is that mindset more evident than in our national obsession with weight loss. Instead of crafting and committing to a long-term lifestyle that promotes a healthy weight, we bounce from fad diets to hot supplements to exercise contraptions looking for pounds to melt away. When they don’t, we’re on to the next gimmick or program.
Stupid, right? Anyone can see that.
So why do we too often take the same impatient, shortsighted approach to investing? I see it all the time as a financial advisor. I’ve spoken with any number of people who are looking for a strategy to replace their current strategy, which replaced the one before that. Sometimes these folks have steered their own investments, chasing hot stocks or attempting to build growth portfolios to their own dissatisfaction. Other times they are looking to replace an investment professional whom they feel isn’t delivering.
These investors are dissatisfied with anything other than rapid and steady growth in the value of their holdings. So, they jump in and out of the stock market at the first sign of turbulence from events like Britain’s vote to the leave the European Union, or rumors of a Fed interest rate hike. Such impatience and fear-driven behavior not only fails to advance the investor’s goals, it actually sets them back.
The plain and simple, historically-proven fact is that there is no magic bullet. There are no short-cuts to building wealth. There isn’t even a “secret” to the process of amassing a serious nest egg. It all comes down to consistency, discipline and time. Here’s how it works:
1. Start early. Time is nearly as important as money when it comes to growing wealth. Compound growth is the process by which income (interest, dividends) from an asset is reinvested and generates even more income. Over a period of years this financial phenomenon can have a dramatic impact on the growth of your portfolio. So, the sooner you start, the better. Example: If you save were able to invest $10,000 per year from age 25 to 65 that $400,000 would grow to
$1.9 million, assuming a 6.5% rate of return. Start saving $10,000 per year at age 35 and you net about half that amount, $920,000.
2. Have a plan. If you don’t know where you’re going with your money, you will never get there. Set long-term goals (retirement, buy a house) and develop a realistic plan to achieve those goals. That plan should include a well-crafted investment strategy, the amount of money you need to save monthly to fund that strategy, and a budget that prioritizes your long-term goals.
3. Be consistent. Stick with the plan. Year-in, year-out. That means saving regularly preferably through automatic program like your employer’s 401k or direct deposit to an investment account.
It also means staying with your investment strategy even when things get a little (or a lot) hairy. Extensive research has proven that jumping in and out of the market in an effort to avoid down turns or catch updrafts most often results in lost growth opportunities.
A Vanguard executive recently noted that during the 2008 financial meltdown, the mutual fund company was inundated with calls from clients seeking insight on the crisis. But the firm did not see a spike in transactions. Its well-informed clients understood they were holding quality stocks that would likely whether the storm.
So, there you have it, the Non-Secret of Successful Investing. It’s not especially sexy and it’s not endorsed by any aging celebrity. And while it is simple enough, I won’t say it’s easy. It takes effort, self-discipline and the occasional dose of courage. But it works. In fact, it has a hell of a track record.
All you have to do is get started.