We started saving as soon as we got our first jobs. My wife and I set aside 10% or more of our paycheck each month and have maintained this discipline through our 26 years together. In this context, we’ve been successful savers. In spite of this, we’ve certainly made our share of mistakes along the way, often getting in our own way of building a wealthy future. Fortunately for us, these mistakes happened early in our lives and we were able to learn and recover.
The problem for many, of course, is the inability to spend less than we earn. That is, to save enough. Often, this comes down to motivation. It’s hard to motivate savings if you do not have a good understanding of how to effectively make your savings work for you. By the time we get around to it, it’s much too late in life. At this stage of life, mistakes are amplified as we don’t have sufficient time to recover. This is the irony and the reason why it is hard to achieve financial independence.
Here are three ways we tend to sabotage our ability to build wealth.
1. Starting too Late
For many, procrastination is a mysterious force that keeps them from completing the most important tasks in their lives. Often, we put off something we deem important simply because we believe it may not necessarily be urgent. We know it is important to save for our future, but we typically underestimate the damaging effect of delaying this task. This is due to the fact that most of us do not realize the tremendous power of time and the impact it has on our ability to create wealth. Let me give you an example to illustrate.
Suppose you had made a one-time investment of $100 in a fund representing the entire US Stock Market in 1987 (yes, you can buy such a fund). If you had left this investment untouched for the past 30 years, with all dividends re-invested, the value of your investment today would be about $1,560. On the other hand, if you had delayed this investment by 5 years (i.e., waited until 1992), you’d only have $798 today. Almost half as much. You can check use this online calculator to test other scenarios.
Of course, most people would not only make a one-time investment. Rather, the first investment typically leads to a regularly habit of saving and investing. I’m sure you can envision the damaging impact of delaying a savings and investing habit based on the above example.
2. Lack of Conviction
Many investors lack conviction in two ways.
First, for many, it’s hard to believe that saving a large enough sum of money to attain financial freedom is actually possible. It just seems too hard a mountain to climb. In many ways, this lack of belief likely causes our tendency to procrastinate as discussed above.
Second, while the compounded annual growth rate of the entire US Stock market has been approximately 9.2% (per year) over the past 30 years, on a year-to-year basis, the performance of the stock market has fluctuated wildly between -38.4% and +34.1% – see the chart here.
Most investors lack the conviction to stay the course. That is, to avoid selling and exiting our investments during the lowest of the lows (e.g., 2008) or buying more during the highest of the highs (e.g., 1995). The number one trait of a successful (long-term) investor is Conviction – they are empowered by their conviction that they are on the right path and should not deviate in spite of the short-term insanity of the stock markets.
3. Trying to Win
Many investors lose because they try to win. That is, they try to outsmart other investors by trading their investments based on short-term predictions of the future price of their holdings.
A recent study, published by Forbes magazine shows that the “average” investor had underperformed a wide range of asset classes by a very wide margin. While some of this underperformance has to do with the high fees many investors pay for investment management (a topic for another day), the study found much of this poor performance was a result of buy and sell decisions, which are often driven by emotion and the (false) belief that we can win against everyone else.
A wealthy life is possible for most of us. Start the habit of saving as early as possible, establish your strategy and develop the conviction to “stand still” during the inevitable ups-and-down over a 30+ year time horizon, and stop trying to beat everyone else.