I thank god that I started saving heavily and investing right after graduate school when I was 29. I was lucky in that I was raised by a single mother taking care of four kids and working three jobs. Adversity teaches a great deal. At the time it was painful, but now I look at it as one of my greatest assets. Thank you mom. You're the best.
With few pensions today, most workers have to save and invest on their own accord. Unfortunately, the large majority of people don't realize this fact until it is too late. You can't win a marathon by starting an hour after the race has begun, even if you are a "world class" runner.
Most people will need 20 to 30 years of heavy saving to retire at a reasonable level. That time is needed just to amass a critical amount of assets by the pure act of savings. During the same time that the investor is pursuing a saving plan, it is critical to be growing those savings by investing effectively. It takes 15 to 20 years for a "nest egg" to start to achieve more growth in an investment portfolio by growth within a portfolio than by adding additional funds to the portfolio. I refer to this as "going exponential".
Given this, there are lots of headwinds working against most people. Spending too much and not saving enough is a huge item. I call this “ostriching”. This is when the challenges ahead are ignored by the ostrich by putting its head in the sand. Many don't start thinking about retirement savings on the "front 9". Or, they plan to address it on the "back 9". By that point, they have lost the wind to their backs as the winds shift from a backwind to a strong headwind. Planning to save in the later part of a career is usually a mistake. It can work, but the odds are highly stacked against this method.
The attached article speaks to the high probably that most will not be able to hold that higher paying job just when they plan to ramp up savings. The offloading of experienced and seasoned employees when they are most knowledgeable and grounded is the reality of the myopic vision of companies in the current environment. They are penny wise and dollar foolish. Because of this, saving for retirement late in a career is precarious. At that point, it is a huge lifting effort since most progress must be made by the savings effort and little will be achieved with internal portfolio growth.
You think, "That will not happen to me." Think again. Just like when you are just married, you and your spouse see a young parent yelling at their small kids at the grocery store and clearly stressing. You say to your spouse, "That will not happen to us." but then it does. This happens with a lot of things until you finally get to the point where you realize a lot of things you think will not happen to you, will happen (not everything, but a lot). This is the essence of the maturation process.
If you can make it through the "savings gauntlet", the next headwind is the investing headwind. Think of the old Client Eastwood movie “The Gauntlet”. Fees, not accounting for behavioral biases, "lottery ticket" investing and poor advice all work against most. Getting educated in all aspects of investing is crucial. Some plan to put their investment returns on auto-pilot, but risk their financial independence and retirement as a result. Each person is ultimately responsible for their own results, since pensions are few and far between now days.
Whereas as single percentage point is small in many financial and non-financial areas, the compounding effect of even a half of a percent of fees has an exponential effect over 25 to 30 years. Think of it as a negative compounding effect. Compounding can work either for you (portfolio growth) or against you (fee growth). If an investor wants their broker or adviser to have a great income and retirement, so be it, give them that half a percent and let them live the good life to the investor’s demise. We all make our own choices.
Behavioral biases cause investors to do things such as sell out when they should be buying. Do you run away when you see a great sale at a retail store? The investment markets are one of the few areas where people run from sales. Why? Another bias, the herding effect. Everyone else is running. We still are just like the buffalo on the Great Plains unless we consciously understand the behavioral biases that we are subject to. It is imperative to learn about behavioral biases and avoid them like the plague.
"Lottery ticket" investing hurts when the money invested is “invested” with little probability of that golden return and a high probability of a loss of the capital invested. Many young people approach their investing this way. It is important to invest conservatively early in a career to get to the point sooner where "exponential" growth is achieved in a portfolio. Don't think, “I have time to make it back if I lose it.” Think, “I need to consistently make the right moves to get to financial independence”. Like sports or a career, mistakes will be made, but minimizing mistakes and making proper adjustments are essential to succeeding. Steadily hone in on the bulls eye! The key point is to get on that path. Time is of the essence and cannot be recaptured.
Finally, brokers are predominately salesmen, not financial people. Their motivations are to either get more sales where they get a commission for each sale or get more AUM (assets under management) where they get a percent whether they work or not and whether the investor’s return is positive or negative. AUM's are universally loved by investment salespeople. They love to tout the AUM they have under management like the "Red Badge of Courage". AUM’s are like annuities – they keep on paying. They are great for the salesman, but have a significant negative compounding effect for the investor. This is why wrap accounts are pushed so much these days. The brokerage, mutual fund or the broker get a nice steady flow of income (“Where are the customers yachts?!). The broker relationship reminds me of the old song from 1971, "Smiling faces sometimes".
With many companies looking at 40 year olds as old and 50 year olds as ancient, there is a high likelihood of "pulling a hamstring" before an investor gets to the back 9 and will get pushed off the course. Life can be highly random. Anyone who tells you otherwise either hasn’t lived or is lying. Learn vicariously.
Remember the screaming parent at the grocery store. It will not happen to you. As my kids used to say, “Yeah right!”
