High returns are interesting it is what people like talking about over a cocktail on the weekend. “My rental property returned 22% this year”. “Netflix stock is on a tear this year I am up 57% YTD”. Returns are what sell investments to groups of investors. It is what gets people to pay high fees to investment pros to beat the market. Yet for most Americans returns should not be what they are focusing on.
Focus on Your Saving/Investing Growth Rate
If you didn’t care about your investment returns you would be crazy, I am not saying put your money into anything and everything. My argument is that you will not get rich overnight off the 10K you put into your investments this year. It is a great start but the power you really have is time to let your investments build and the ability to invest as much as possible while young. Don’t worry about your 10k getting a 100% annual return, that would be fantastic but that only gets you to 20K nothing life changing there (not to mention the return is unsustainable and unrealistic). Instead focus on how to invest an extra 10K next year then you did in the previous. It is way more realistic that you make an additional 10K this year and invest it then trying to swing for the fences and take the risks required to get a 100% return.
It is rewarding to steadily increase your investments and it will move the needle in down and up years. If you focus on this you will be well prepared when the next downturn comes as you will have positioned yourself to deploy more capital purchasing lower priced assets while building up your stash.
How to Increase Your Saving/Investing Rate
Simple, two sides to this equation income and expenses. That’s it either increase your income or decrease your expenses. In my opinion there is a lot of low hanging fruit regarding expenses available when you are young and don’t yet have expensive tastes. Cut down on the big things as your starting point, we all know them. It’s not the cup of coffee it’s the expensive bar tabs, car/student loan/credit card payments, and expensive housing that is holding most back. Find your biggest leak and plug the hole, do something now to set yourself up to invest more in the future.
After you have focused in on cutting down the big expenses switch your focus to increasing your income. This is so much more powerful than worrying about spending an extra $20 on groceries this week. You are most likely just getting started in your career, so light a fire in your belly and focus on how to earn. Figure out how to increase your W-2 income this is most likely the greatest source of income you have. Then brainstorm ways to make some additional money and make sure that after you make it the money is put to work paying down your debt or purchasing more assets.
When Does the Focus Change?
There is a tipping point to this equation however and that is the good news. Eventually your investments will most likely outpace your saving/investing rate with their returns. I would recommend that most people invest in a well-diversified low-cost index portfolio up until they reach a 250K portfolio. Don’t look at your statements the market will move up and down instead focus your efforts on how you can invest more each month, this is where the true growth will come from in the early years.
What Are Your Thoughts?
- How much focus and time do you put into your investments?
- How much time and energy do you put into saving and investing more capital?
- Which would you argue is more important with assets under 250K?