Savings is More Important Than Investment Returns, At First

Welcome to The Alpha Snail! If you’re interested in learning more about finance, philosophy and wealth creation, you’re in the right place!

Subscribe below to get my next article delivered directly to your inbox! P.S. No spam…ever

You’re busy. You’re curing cancer, you’re making sure the new Iphone camera doesn’t melt, you’re starting a business, raising a family, or hell… just binge watching Bridgerton.

Investing your money is something you know you “should” be doing, but I’ll be the first to tell you, it can be intimidating.

Often times, the perceived complexity of investing is the biggest deterrent from investing in the first place. I’m here to assure you, that for at least the first decade of your career, it really doesn’t matter.

Shooting For Average

The S&P 500, is a stock index that tracks the performance of 500 different companies in the US Stock Market. By purchasing a share of this Index, you’re buying one tiny sliver of 500 different companies.

If one of those 500 companies has a bad year, you’ll experience very little change in the overall value of your investment. Conversely, if one of those companies has an outstanding year, you will be effected very little as well.

Your upside is limited, but so is your downside.

On average, since its inception in 1957, the S&P 500 has increased year over year about 10.5%. If you bought $1000 of the S&P 500 Index in 1957, you’d have about $658,000 today.

This is the average, this is the benchmark, and from my point of view it’s not too shabby.

Growth, Two Ways

When seeking “above average returns”, you’re inherently taking on greater risk in an attempt to aggressively grow your investments. For passive investors, like myself, this is a non-starter.

I have no need, or desire to double my money next year.

If I want to “retire” right now to Costa Rica, filing my days with surfing, fresh coconuts, and Gallo Pinto, it’ll costs me about $17,000 a year.

Having $10M in the bank by the time I’m 40, has very little appeal to me if it means I have to repeatedly risk losing it all.

I personally think an 8-10% growth rate, with essentially no risk, is incredible. Many people disagree, but this is a false dichotomy.

It’s easy to get caught up in the “High Risk vs Low Risk” debate. The reality is that there are two ways to grow your investment portfolio.

1. Investment growth and appreciation.

2. Cash saved from your salary.

The former is where everyone spends their time, but is virtually meaningless for your first ten years of investing. The latter will be the foundation of your fortune.

What you can control

There are only a few things that we can control in this world. As far as our finances go, it’s important to know what we can and can’t.

Let’s walk through a few different hypotheticals.

• How easily could you decrease your weekly expenses by $190? Might be hard, but doable.

• How easily could you increase your salary $10,000 a year? Harder, might have to find a new job, but possible.

• How about increase your investment returns by 40%? Good luck.

All three yield the same results, but the method by which they are achieved makes all the difference. The first two, are almost entirely under our control. The last is little better than blind luck.

On accounting for luck, Peter Lazaroff, Chief Investment Officer of $5.3B in assets at Plancorp, noted.

When building our portfolio, we welcome luck, but have no need for it.

Therefore, the majority of our time and focus should be spent on the two elements above that we can control. Spending, and Earning.

The First 10 Years

The truth is that, for the first ten years you’re in the market, the amount of money you save for investments will be higher than the returns you get from those investments.

That’s to say, if:

• You put $26,000 into the stock market at the start of this year.

• That money will return you, on average, $2000 by the end of the year.

• So the amount of money you contributed from your paycheck is 13 times larger than what the market returned to you.

Here’s what this looks like over a 12 year period.

Year 1: You contribute $26K, you make $2K.Year 2: Another $27K for a total of $55K, you make $4K.Year 5: Another $30K for a total of $171K, you make $12K.Year 8: Another $32K for a total of $324K, you make $24K.

Each year you’ve contributed $26,000 (plus a 3% raise), and up until this point you have never made more in the stock market than you’ve saved.

Not unit year 10, do you cross that critical mark.

Beyond Year 10

Seeking out 25% annual returns during your first ten years of investing, is like worrying about what font to use on your resume before you have any work experience.

You’re putting the cart before the horse.

For the first ten years, building a strong base, and consistently contributing to your investment account is critical. Once you pass that 10 year mark, your investments will soar.

Here’s an extension of the chart above. Let’s see what happens beyond year 10.

In the 30th year of contributions, adjusted for our 3% raise, we’ll be contributing about $60K per year, but our annual returns will be over $300K. We’ll have flipped our initial ratio from 13:1 to 1:5.

What this means is that:

Years 1-10, we should be focusing our attention on maximizing the amount we can save for investments.

• If we have a portfolio valued at $100K when we’re 30, seeking just 1% better returns will generate $1,000 annually. The same amount we’re saving from our paycheck in 2 weeks.

Years 10-30, we should be focusing on managing our investments and seeking out incrementally better returns.

• If we have a portfolio valued at $4M when we’re 60, seeking just 1% better returns will generate $40,000. The same amount we’re saving from our paycheck in 8 months.

Final Thoughts

“The First Ten Years” gives you permission to be lazy. It demonstrates that all the fancy jargon around investing is virtually meaningless, until you’ve been steadily investing for a decade.

So go, enjoy Bridgerton guilt free, knowing that what matters most for your First Ten Years is building a steady base, aiming for average, and controlling what you can control.