How To Retire Faster
I like to think of investing like a long road trip, driving for miles on the open road. And I like to think of the speed I’m driving at, like investment returns, and any rest stop breaks or detours like my money not in the market, not working for me.
If you are like me, a long-term buy-and-hold investor, we can’t significantly control our investment returns. There are practical things we can do, such as cutting expenses by investing in low-cost index funds. But after that, we all need to follow the speed limit; the average market returns.
But the key culprit to people slowing down their journey to retiring faster is the rest stop breaks and the detours we take during our road trips. We often intentionally or unintentionally have our money sitting on the sidelines, not working in the market. Not growing and not helping us retire sooner. So let me share with you five strategies to ensure we aren’t taking these breaks or detours on our road trip towards early retirement.
01 - Reinvest Dividends
A dividend is a reward, usually cash, that a company or fund gives to its shareholders on a per-share basis. When a stock or fund that you own pays dividends, you can pocket the cash and use it as you would any other income, or you can reinvest the dividends to buy more shares. Having a little extra cash on hand is tempting, but reinvesting your dividends can really pay off in the long run, especially in your journey toward early retirement.
For most index funds, when you initially set up the purchase of securities, you'll be asked whether you want any dividends transferred to your settlement account or reinvested in more shares. My recommendation is to resist the temptation to transfer it to your settlement account and select reinvest to buy additional shares. This has a few benefits.
One is you have one less thing to do if you want to reinvest dividends. Your investment firm does it for you automatically.
Two is that you buy shares on a regular basis every time you get a dividend. This is dollar-cost averaging (DCA) in action.
Three is that you're compounding your investment's growth by continually adding more shares which, in turn, will generate dividends of their own in the future. You are essentially supercharging your long-term returns through the power of compounding.
Don’t let your dividends stop at the rest stop, get them back on the road immediately, so they are working for you right away.
02 - Don’t Time The Market
Subconsciously we all do this to an extent. We say statements like the following:
“The market is up right now, so I’m going to wait until it dies down before I buy.”
“My Tesla stock is down right now, but it should jump back up again soon.”
And when someone points out that we are timing the market, we often acknowledge that timing is not a smart move. But we also present all sorts of reasons why it makes sense in our specific situation. The bottom line is that if we are waiting to buy or sell until some point in the future, then we are timing the market.
I get into this wrinkle constantly. Though we have set up automatic investments on a regular basis, at times, I can’t help but look at the market and consider the idea of delaying the purchase or making it sooner because I think the market is either overvalued or undervalued. Then my wife, who is much wiser than I, would need to kick some sense into me. Experts have long cautioned against trying to time the market.
“The market timer’s Hall of Fame is an empty room.” - Jane Bryant Quinn
When we try to time the market, we are making investment decisions based on emotion, not logic. And worst of all, we are keeping money out of the market. Waiting at the rest stop. Focus on time in the market, timing the market. In other words, don’t wait at the rest stop trying to time the perfect traffic. Get back on the road as soon as possible.
03 - Lump Sum, Not Dollar Cost Average
“Dollar-cost averaging,” also known as DCA, is a phrase that refers to investing regular amounts over time. Such as weekly, monthly, or quarterly. Rather than investing all your money in a fund at once. Lump-sum investing, on the other hand, is when you take all of your available dollars to invest and put it right into the stock market. If you have the money available, you don’t spread it. You get it to work for you right away. It’s the opposite of dollar cost averaging.
Now, generally, I’m a big fan of dollar cost averaging. And this is primarily due to the psychology behind investing. Most often, more than technical knowledge or unique insight, psychology plays a bigger role in our returns than what or how we invest.
“In the end, how your investments behave is much less important than how you behave.” - Benjamin Graham
However, when we look at it from a purely analytical perspective, lump-sum investing actually beats dollar-cost averaging from investment returns. In Vanguard’s 2012 research, they looked at the difference between dollar-cost averaging and lump sum investing by assessing different stock-to-bond allocations in three different countries: the United States, the United Kingdom, and Australia. It looked at rolling 10-year periods from 1926 to 2011.
Source: Vanguard 2012 Study, LSI vs DCA
They found that at the end of the 10-year period, the lump-sum investment led to greater portfolio values approximately two-thirds of the time. Even when results were adjusted for the higher volatility of stock-to-bond allocation versus cash investments, this result was consistent across all three markets. The study's recommendation was this: invest the lump sum immediately to gain exposure to the market as soon as possible.
And other studies have supported these findings as well. A similar study done by Northwestern Mutual, primarily in the US market, found similar results. They concluded that Lump-sum investing outperforms dollar cost, averaging almost 75% of the time regardless of asset allocation.
In simple layman’s terms, the bottom line is this. Because the market normally goes up, investing early produces higher returns in most situations. So if you can, lump sum and get your dollar to work as soon as possible. Again, don’t wait at the rest stop. Get back on the road as soon as possible.
04 - Avoid Analysis Paralysis
This is akin to someone just not investing and investing enough because they are overwhelmed with all the choices out there. Investing sounds and feels complicated. It conjures up images of complex mathematical formulas and really serious-looking people evaluating fancy charts on a computer screen. But it only sounds and feels complicated because the financial industry is working hard to make you feel that way. It’s the ultimate financial marketing machine at work.
And what happens to many of us is that we get so overwhelmed and never pull the trigger to invest in the market. And this can be detrimental to our wealth and our future retirement. If you are reading all these posts and you have yet to invest any money in the market, you are not being very generous to your future self.
I guarantee you that when you are in the latter stages of your life, you will regret not having invested in the market sooner because you were scared. Having cash is good. But it will not build substantial wealth. It loses its value over time due to inflation. You are literally just hanging out at home, afraid to get on the road. You want the market to work for you to compound your money over time, and the sooner you begin, the better. Here are some of my favorite equities index funds to start out with.
All these funds are variations of the total market or the S&P 500 index and all excellent equity funds to kick off your investing road trip. Don’t linger around at home. Start that journey.
05 - Don’t Speed
When I mean speeding in investing, I’m referring to either stock picking or trying to pick winning mutual funds. Chasing better returns. Actively Managed Stock Mutual Funds are funds run by professional managers, as opposed to Index Funds which are passively managed essentially by a computer. They are one of the most profitable investment products in the industry. And when I say profitable, I mean for the companies that run them. Not for individual investors like you and me.
What’s so fascinating about the mutual fund market is that there are actually more mutual funds out there than stocks. According to the U.S. News and World Report, there are about 4,600 equity mutual funds operating in the US. Do you know how many total publicly traded companies there are in the US? Slightly over 4,000.
Yes. There is more packaging of the goods rather than the goods themselves. Pretty interesting if you think about it. But the sad fact is that very few of these actively managed funds beat the index over time.
In 2013, Vanguard studied over 1,500 actively managed equity funds over a 15-year period and found that 82% of the funds failed to outperform the simple index. But actively managed mutual funds will never advertise that they have a horrible track record. They instead bury the underperforming ones and launch new funds to entice new investors.
When there is a lot of money to be made, especially for investment firms, don’t be surprised by how far they will go to keep their highly profitable investment products selling. Don’t speed. Don’t try to find winning actively managed mutual funds or winning stocks in hopes that you will get to your destination faster. Stick to the speed limit and stay on the road.
Bottom Line
If you want to retire sooner, when it comes to investing, don't take breaks at the rest stop, don’t take detours, don’t delay your road trip, don’t speed, and simply stay on the road.
It may feel, at times, frustrating to stick to the speed limit and stay on the road. But that is just what you need to do. Take what the market gives you through low-cost, broad-market index funds, and you might be surprised by how quickly you get to your retirement destination.
