by Maz Jadallah
If you’re a market index investor retiring in the next 10 to 15 years, you could be in trouble and not even know it. If you can solve this riddle, you’ll understand why:
- Two investors; A and B
- Both begin investing on the same day
- Both start with $1000
- Both invest over the same 50-year period
- Both earn exactly a 9% average annual rate of return
- Both invest $500/year the first 25 years and $2000/year the last 25 years
- Investor A ends up with $285,220 or 53% more than investor B
In investing, timing is everything. In our riddle above, Investor A earns 6% per year the first 25 years and 12% per year in the last 25 years (averaging 9%/year). Investor B did the opposite, earning 12%/year the first 25-years and 6%/year the second (still an average of 9%). Here’s the critical point – because Investor A’s portfolio was larger in size when it started to compound at the higher rate, they end up with much more in retirement savings.
Here’s the math:
Put another way, the rate at which your portfolio compounds during the later years is going to be the single biggest determinant of your portfolio’s size. So, if you are in the later stages of investing for retirement and you elect to invest purely in market index funds, what the market does over the next 10-15 years is going to have a huge impact on your outcomes.
If you see similarities between yourself and Investor B, a strategy that seeks to outperform the overall market might help you overcome the market’s expected lower returns. Historically, that’s been a lot easier to say than do for most investors. Consistently good active strategies are hard to find, can be hard to access, and are usually expensive.
At AlphaClone, our mission has always been to help investors do better than just okay. Our strategy has consistently outperformed the overall market and can be accessed affordably and easily via ETF or separate account. If you’re on the home stretch to retirement, it might be the most important decision you make.
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