Financial Opinion and Insights

Three Components of Investment Success

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

Planning to retire?  Hoping to live off your retirement assets and never run out of money?  No matter what your situation is, it’s important to understand the three components of investment success – and especially their relationship to each other.

  1. Time
  2. Amount
  3. Return

Time:  How much time do you have?  During your working years you need to know how many years you plan to work, as well as the number of years you plan to spend in retirement.  If you’re retired, I think you should plan to live to age 100.  Yeah, I know, you don’t expect that.  It’s okay.  I’d rather you be wrong on that side than planning shorter.   Let’s face it, running out of money too soon is NOT fun. 

Amount:  How much do you plan to invest monthly or quarterly during your working years?  How much do you plan to withdraw during your years in retirement?  Think you’ll need less?  Think again.  I’ve been watching new retirees for almost 19 years now and this is what I’ve noticed:  Sure, they have no commuting costs and they’re not eating lunch at work anymore, but they also have more time on their hands and they want to travel, visit grandchildren, go out to eat, play more golf, see plays, etc.  I’ve seen people spend more, not less, in their early years of retirement.  You may be different, but if you think you’ll just sit around and watch Oprah, you may be in for a surprise.

Return:  What return do you think your investments will generate during your working years?  How much return do you think they will generate during your retirement years when you’re making withdrawals?  Did you know it’s possible to earn a 12% average annual return each year while withdrawing 12% annually and STILL run out of money?    It really doesn’t matter what percentage you use – that’s not the point.  What IS important to understand that an average annual return is just that – an average.   But, most investments don’t return the `average’ every single year!  It’s not just volatility, but the ORDER of returns that can hurt you.  Nevertheless, you need a planning process that allows for testing for both volatility (fluctuations) as well as the order of returns.

How are these three inter-related?

Let’s look at the relationship during your working years.  Those three components differ.  While the amount you invest and the return you achieve can both fluctuate, the first component – time – doesn’t.  In fact, `time’ is the one factor that ONLY goes DOWN!    If you have ten years left now, you’ll have only nine years left next year.  Time doesn’t increase and it doesn’t stand still.

The `rub’ is this:  As time diminishes, one or both of the other two components must be increased in order to achieve the same result!    You must either invest more or achieve a greater return.  And, that is where, for some people, the seeds of destruction are sewn.  Most people put-off planning and investing.

Let’s analyze this.  If `time’ and is declining and these people are putting off investing, the amount is zero.

Guess what has to be increased to make up for lost time and zero as the amount during those years?  You guessed it:  Return.  People who wait too long often feel forced to `reach’ for a higher return… which means more risk.  Not good.

It’s common sense.  Begin early.  The more time you have in front – and that component will never get better – the less pressure you put on the other two components.

To learn more about investment success, you might want to read our report, Why Investors Fail.  You can use the ‘Request Info’ button on our website to request your copy.