There’s something really tough about growing wealth. It’s that life isn’t lived on a spreadsheet.
I can easily demonstrate to you that it does not take great feats to achieve great wealth. A harmonious blend of modest savings, decent returns, and a good amount of time can result in impressive sums. I have a spreadsheet that shows exactly that. I would be happy to show it to you.
But life isn’t lived on a spreadsheet.
The financial news loves to highlight investors who made a quick buck. On a routine basis, there is a seductive article written about someone who made a whole lot of money with very little time and almost no effort. That’s an intoxicating mix.
People see that and think, “They found a shortcut to wealth.” And who doesn’t like a shortcut?
Unfortunately, that same intoxicating mix can lead to combustion. It has blown up more wealth than it has ever created. Anyone who makes that much money in that short of time is not investing; they are speculating.
Fortunately, despite the incessant news headlines that seem to indicate otherwise, it doesn’t take extraordinary things to amass great wealth. It takes a lot of ordinary things done consistently over a long period of time. But that’s hard.
How do I know it’s hard? Because most people don’t do it.
The simple recipe for wealth is savings, time, and returns. No other variables matter. One of the three, however, invariably trips up people on the road to wealth. To the surprise of many, it’s rarely the last of the three – returns – that gets people in trouble.
We often tell a story to clients about a guy named Bob. The idea for Bob came from another financial writer named Ben Carlson.
Bob was an average guy. For his 30-year career, starting in 1978, he made the average U.S. household wage. It was enough to live on but not nearly enough to afford an extravagant lifestyle.
Bob was also a good saver. He saved 12% of his gross pay every year, like clockwork. But Bob was a terrible investor – in fact, he was the world’s worst market timer. Every year, he saved his 12%, but he parked the money in a savings account. Only when he felt the time was right did he take all of his accumulated savings and put it in the stock market through his retirement account.
Bob’s timing, though, was all wrong.
Every time he saved up a sum of money and invested it, the stock market went down the following year. But Bob kept the money in the market and started shoveling his future 12% savings into a savings account, until he got the urge again to invest in stocks. But when he did, it was the exact wrong time.
He did this for 30 years: saving, accumulating, then investing his savings right before the market dropped the next year. In total, over his career, Bob would have saved $201,600.
But how well did Bob do? How big was his retirement account at the end of his career? What do you think?
As it turns out, Bob would have accumulated $1.3 million. Surprised? And remember, he would have achieved that feat earning the average U.S. household wage his entire career.
Bob did something ordinary for a very long time. He saved 12% of his paycheck his entire working life. He lived out what my spreadsheet shows. Now, he got the investing part – the returns – very, very wrong. But it didn’t matter. His savings made up for it.
That’s why we tell clients that saving is more important than investing. It is the opposite of what most people think. Believe it or not, though, it’s true.
Ordinary things done consistently over a long period of time left Bob with a sizable nest egg.
It can do the same for you.