Simplicity and Consistency - The Keys to Growing Your Wealth
You Don't Need To Generate The Highest Returns Possible
It’s easy to get caught up in the allure of individuals stocks, actively managed funds, or complex alternative investments. We hear the success stories which tempt us to chase after the highest returns possible.
However, for most of us, the path to financial independence lies in simplicity and consistency.
Imagine this: you start to build up a balance in a S&P 500 index fund. Once that balance hits, say $10,000, you begin to diversify with a few additional ETFs covering other areas of the market (large cap growth, large cap value, small cap growth, small cap value, international, etc.)
Done.
Is it really that easy?
Yes, it can be, as long as we don’t let our ego and desire for get rich quick schemes get in the way.
One of the biggest mistakes investors make is a lock of consistency.
We live in an era of instant gratification.
The idea of waiting 20+ years for substantial wealth growth seems too long and boring.
But history has shown us that is the way:
Over any 20-year time period, since 1928, the S&P 500 has NEVER lost money…
We want to be rich now. I want to retire today. I need to see results in 10-years or less.
But chances are I’ll see you on the Tobin Bridge in 5…
The truth is that wealth-building requires discipline, patience and faith - qualities that I’d argue our generation lacks.
Getting started can be the easy part. Continue to grow your income and add onto the fairly simplistic index funds you own.
The hard part is resisting the temptation to over-diversify. You don’t need to own more than 10 ETFs, that’s overkill.
I’ve hit on avoiding the big mistake before.
Not many fully grasp the idea of you don’t need to make a killing in the stock market, you just have to make sure you don’t get killed.
Do you want to destroy your wealth? That’s easy - panic when the market falls and then chase performance.
Consider this example: from early 2000 through 2009, the best performing mutual fund was CGM Focus Fund, which averaged 18.2% per year for a decade. Not bad considering this was during the so-called “lost decade” when the S&P 500 was flat/slightly down over this 10-year period.
Yet, many investors actually lost money.
Per a WSJ Article from around this time:
Too bad investors weren't around to enjoy much of those gains. The typical CGM Focus shareholder lost 11% annually in the 10 years ending Nov. 30, according to investment research firm Morningstar Inc.
You read that right. The mutual fund average 18% per year, and the average investor lost 11% per year.
How is that even possible? It’s the classic buy high and sell low:
The gap between CGM Focus's 10-year investor returns and total returns is among the worst of any fund tracked by Morningstar. The fund's hot-and-cold performance likely widened that gap. The fund surged 80% in 2007. Investors poured $2.6 billion into CGM Focus the following year, only to see the fund sink 48%. Investors then yanked more than $750 million from the fund in the first eleven months of 2009, though it is up about 11% for the year through Tuesday.
You may believe that in order to become a millionaire you need to make hundreds of thousands of dollars a year and you need to generate the highest returns possible.
But the key is to consistently save money, I don’t care how small, and then generate average returns over an extended period of time.
This means you will have to develop a muscle of blocking out market noise.
Watch CNBC for an entire day.
You will find that each guest will come on, sound incredibly smart and compelling, but their underlying message is, “I don’t really know what’s going to happen.”
Or the classic in the finance industry, “welllll, it depends…”
I found this out the hard way. Investing in individual stocks, watching CNBC religiously, looking at a companies earnings reports (lol).
The lesson - no one knows with any certainty what’s going to happen. So why let market fluctuations dictate my emotions? Why spend countless hours researching this stuff?
I Stumbled upon a Jason Zweig post originally from 2001, that summarizes this perfectly:
Will value stocks do better than growth stocks? I don’t know, and I don’t care — my index fund owns both. Will health care stocks be the best bet for the next 20 years? I don’t know, and I don’t care — my index fund owns them. What’s the next Microsoft? I don’t know, and I don’t care — as soon as it’s big enough to own, my index fund will have it, and I’ll go along for the ride.
Many investors make the mistake of overcomplicating their strategies, believing that complexity leads to higher returns. However, as your balances grow, the strategy remains fundamentally the same—the numbers just get bigger.
Simplifying your investment approach not only frees up mental energy but also allows you to focus on what truly matters in life. Rather than being consumed by daily market fluctuations and checking your accounts every day, redirect your time towards nurturing relationships and investing in experiences.
Ask yourself: is the stress and anxiety worth it? Investing should enhance your quality of life and lead to financial independence. It should be exciting and enjoyable, filled with the confidence that you're making progress and following the right path.
Of course there will be bumps along the way. The world always seems like it’s ending at least once per year.
Just remember - as prices fall, future returns often rise.
Embrace simplicity, stay disciplined, and let the journey towards financial freedom be a source of peace and fulfillment.
Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
All indices are unmanaged and may not be invested into directly.
All investing includes risks, including fluctuating prices and loss of principal.