Hung Up On Returns?

Are we hung up on returns? I often wonder that as I listen to the arguments for and against different investment classes. Index funds vs stock picking. Owned real estate vs REITs. Dividend stocks vs bonds. There are so many different controversial subjects to touch upon. And each methodology has its own proponents. It certainly can leave the novice investor befuddled and confused. Is their a definitively correct path?

I am far from perfect. I am not an investing expert. Yet, year after year, I seem to do okay.

Timing The Market

Imagine two index investors. They hold the same index fund. Put together by the same company. They pay the same fees. Yet one of those investors is going to reap a 15% average yearly return while the other is going to have a negative return. Want to know the difference?

Simple, it’s timing. Get into the market at the wrong time or be forced to sell assets in a downturn, and you are likely to have much worse results than your peers.

Assuming that you invest in assets that have reasonable growth potential, you are more likely to get stung by bad timing, and less likely by not being such a good stock picker.

We get hung up on returns all the time. But maybe we should focus more on creating optimal timing. Especially when exiting the market. It is harder to optimize entrances.

Horizon

You know what makes a successful investor? Longevity. Again, this is assuming that one has invested in companies and assets that have reasonable growth potential. As long as the companies, governments, or entities that hold your money stay liquid, it’s hard to lose over long time periods.

Index funds. Well picked stocks. Reits. Rental properties. In general, they all build wealth nicely over long time periods. You can get hung up on returns if you want. Shoot for an 8% return over a 7% if that makes you feel more wealthy. But in the end, you will likely succeed if you just hang in there.

The W2/Business Asset class

You know how people really build wealth quickly? They earn it. Income is one of the best ways to build net worth. Why? Because it costs very little. In order to invest in an index fund or or a rental property, my original equity is consumed in the investment. My ten thousand dollars can only make a small percentage of its value when it is invested.

When I work, however, I start with nothing and end with something. I can get hung up on returns all day. But the petty percentage differences in differing asset allocations is nothing compared to what I can make with a few good hours of hard work.

I need millions of dollars of investments to generate what I make each year with zero equity at risk within the W2 and business asset classes.

It just takes a little sweat equity.

Perfect Is The Enemy

And then, of course, is my belief that perfect is the enemy of good. The amount I make each year on my investments is good enough. It supports my life style, allows me to pursue my half retirement, and provides for our family.

Would life be much better or even different if I optimized myself up to making an extra 1% a year?

Financial independence is quite reachable for most even with lower than average returns. Especially if you focus on income generation and frugality. Compounding has a few main factors. If you feed the beast enough fuel and stoke the fires for long enough, suboptimal heat will still be sufficient to cook a pretty fine dinner.

Final Thoughts

While I never look a gift horse in the mouth, I also try not to get too hung up on returns. I would rather focus on timing, horizon, and generating income. For me, perfect is the enemy to good. There are many ways to take advantage of compounding. Total returns is just one spoke.