The Baseline Portfolio
+1 Percent More Return!
You Can’t Do Better Than an Index Fund!
The Solution: Save Just 2 More Percent
Conclusions:
How can the average person become wealthy quickly? You might think you need to be a stock market genius or have an expert manage your money, but that’s not usually true. If you look at almost any early retirement story, the formula is quite simple: save a lot more money.
So why does everyone focus so much on investing instead of saving? While investing is crucial to growing your wealth and turning it into passive income, it’s limited. History shows there’s a cap to the returns an average person can get over the long haul.
Maybe we emphasize investment returns because we believe we’re smarter than we are, thinking we’ll spot something nobody else has. TV shows and headlines like “The Hottest Stocks of the Year” only reinforce this myth. But it’s all just marketing noise meant to distract us from what really matters: investing in straightforward index funds and figuring out how to save as much money as possible.
In this post, I’ll show how saving more money can beat chasing unrealistic returns and an easy way to mimic that extra 1 percent return you’re aiming for.
Let’s make a simple example. Imagine you’re worried about which funds to pick for your 401(k). According to many finance blogs, an index fund will average about 8 to 10 percent return per year over 30 years. Let’s use 8 percent for this scenario.
Now, let’s say you think you can outsmart the market and secure an extra 1 percent, bumping your annual return up to 9 percent. Assume you earn $50,000 per year and save 10 percent of your gross income, which is $5,000 annually or $192.31 per biweekly paycheck.
What if you kept your money in an index fund with an average 8 percent annual return? After 30 years, you’d have $566,416.
Now, what if you somehow found that “magic” fund with a 9 percent return? You’d end up with $681,538 – an extra $115,122. But such a “magic” fund doesn’t exist. Studies, including Jack Bogle’s teachings, show that 90% of fund managers can’t beat the market average. So, the average investor is better off sticking with a market index fund and avoiding the fuss.
So, can you still aim for that $681,538 total? Of course, by simply saving more. Increase your contribution rate from 10 to 11 percent, and your savings jump from $5,000 to $5,500 annually. Saving that extra $500 gives you an automatic 10 percent return on your original $5,000.
If you stick with an 8 percent growth rate and extend this over 30 years, increasing your savings rate to 12 percent would give you a portfolio of $679,699, which is pretty close to the 9 percent growth scenario.
Awesome! Instead of chasing unrealistic returns, you achieve similar results by saving a little more each year. Increase your savings rate to 20 percent, putting away $10,000 annually, and your nest egg grows to $1,132,832. Now you’re building wealth quickly!
Don’t get caught up in the numbers. The key message is: saving is within your control, and the market is not. We can assume the market will grow at 8 percent annually, but this is just an average. Your actual return could be different based on various factors, especially the years invested.
As investment legend Benjamin Graham said, nobody truly knows what the market will do next. But saving is definite. If you choose to save 10, 12, or even 50 percent of your income, that’s a guaranteed outcome. Your money might fluctuate depending on investments, but saving more always means you’ll have more to work with compared to relying solely on investment returns. This is crucial in the accumulation phase of retirement planning.
Ask yourself: Do you “can’t” or “won’t” save more money? Notice the difference? Saving more is similar to exercise – it requires effort and discipline for results. There are no overnight solutions. Anyone can save more by optimizing their expenses. Focus on one expense at a time and follow through to see the savings add up for the things that really matter.
For instance, this year, to save money, we’ve already taken certain steps. We’re also working on next year by cutting vacation costs through travel hacking, using credit card bonuses for free flights and hotel stays.
Find more money-saving tips in my ebook, “Save MORE, Earn MORE!: 21 Easy and Practical Ways to Save More Money for Your Retirement and Other Financial Goals.”
In summary, focus on gradually reducing costs, and you’ll be thrilled as the savings accumulate, allowing you to invest in what’s truly important!
